During the year just ended, Shering Distributors, Inc. had pretax earnings from

Question

During the year just ended, Shering Distributors, Inc. had pretax earnings from operations of $490,000. In addition, during that year it received $20,000 in income from interest on bonds it held in Zig Manufacturing and received $20,000 in income from dividends on its 5% common stock holding in Tank Industries, Inc. Shering is in the 40% tax bracket and is eligible for a 70% dividend exclusion on its Tank Industries stock. c. Find the tax and the after-tax amount attributable to the dividend income from the Tank Industries, Inc., common stock.d. Compare, contrast, and discuss the after-tax amounts resulting from the interest income and dividend income calculated in parts b and c. e. What is the firm

Explanation / Answer

The after-tax amount of dividends received, $17,600,

exceeds the after-tax amount of interest, $12,000,

due to the 70% corporate dividend exclusion.

This increases the attractiveness of stock investments by one corporation in another relative to bond investments.

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