1) Two corporations A and B have exactly the same risk and both have a current s
ID: 2663727 • Letter: 1
Question
1) Two corporations A and B have exactly the same risk and both have a current stock price of $100. Corporation A pays no dividend and will have a price of $120 one year from now. Corporation B pays dividends and will have price of $113 one year from now after paying the dividend. The corporations pay no taxes and investors pay no taxes on capital gains but pay a tax of 18 % income tax on dividends. What is the value of the dividend that investors expect corporation B to pay one year from today?2)A firm in Australia earns a pretax profit of $A10 per share. It pays $3 per share (32 % tax rate) of corporate tax. The firm pays the remaining $A7 in dividends to a shareholder in the 32% tax bracket. What is the amount of tax paid by the shareholder under the imputation tax system?
Explanation / Answer
(1) Dividend = (120-113)/ 0.72 = $9.72
(2) zero amount of tax paid by the shareholder under the imputation tax system.
In the imputation tax system, shareholders are taxed on dividends, but they receive a tax deduction,
which is equal to their share of the corporate tax that the company has paid. This is followed in
Australia.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.