Reston, Inc., has asked your corporation, Pruro, debating is whether Pruro shoul

Question

Reston, Inc., has asked your corporation, Pruro, debating is whether Pruro should take Reston stock with a 4 6% annual dividend or a promissory note paying 4 6% annual interest. Assuming payment is guaranteed and the dollar amounts for annual interest and dividend Inc., for ftinancal assistance. As a long-time customer of Reston, your firm has decided to give that assistance. The question you are s for annual interest and dividend income are identical, which option will esult in greater afer- tax income for the first year? are What option will esult in greater after tax income for the first year? (Select the best answer below) 0 A. While 100% of corporate interest income is taxed at ordinary tax rates, O B. Based solely on the tax treatment of corporate dividend income versus interest onty 30% or corporate avidend ncome is treated as taabe name income. Pruro inc. would have greater after-tax income if it chooses the Reston stock paying 4 6% dividends over the promissory note paying 46% interest C. The current tax treatment of corporate dividend income would be the equivalent of recognizing only 138% (030x46 O D. All of the above %) of the 4 6% annual dvidend for tax purposes.

Explanation / Answer

Option.D) all of the above

While 100% of corporate interest income is taxed at ordinary tax rates, only 30% of corporate dividend income is treated as taxable income.

?The current tax treatment of corporate dividend income would be the equivalent of recognizing only 1.38% (0.30 x 4.6%)of the 4.6% annual dividend for tax purposes. ?Based solely on the tax treatment of corporate dividend income versus interest income, Pruro Inc. would have greater after-tax income if it chooses the Reston stock paying 4.6% dividends over the promissory note paying 4.6% interest.

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