Kraftstoff of Germany. Kraftstoff is a German-based company that manufactures el

Question

Kraftstoff of Germany. Kraftstoff is a German-based company that manufactures electronic fuel-injection carburetor assemblies for several large automobile companies in Germany, including Mercedes, BMW, and Opel. The firm, like many firms in Germany today, is revising its financial policies in line with the increasing degree of disclosure required by firms if they wish to list their shares publicly in or out of Germany.

Kraftstoff's primary problem is that the German corporate income tax code applies a different income tax rate to income depending on whether it is retained

(4545%)

or distributed to stockholders

(3030%).

The company's earnings before tax (EBT) is

euro€483 comma 500 comma 000483,500,000.

a. If Kraftstoff planned to distribute 50% of its net income, what would be its total net income and total corporate tax bills?

b. If Kraftstoff was attempting to choose between a 40% and 60% payout rate to stockholders, what arguments and values would management use in order to convince stockholders which of the two payouts is in everyone's best interest?

Explanation / Answer

Kraftsoff EBT 483,500,000 Tax Rate Tax Liability Net distribution 50% distributed 241,750,000 30%     72,525,000          169,225,000 50% Retained 241,750,000 45% 108,787,500 Total Net Income after tax and distribution 132,962,500 181,312,500 Kraftsoff-40% distributed EBT 483,500,000 Tax Rate Tax Liability Net distribution 40% distributed 193,400,000 30%     58,020,000          135,380,000 60% Retained 290,100,000 45% 130,545,000 Total Net Income after tax and distribution 159,555,000 188,565,000 Kraftsoff-60% distributed EBT 483,500,000 Tax Rate Tax Liability Net distribution 60% distributed 290,100,000 30%     87,030,000          203,070,000 40% Retained 193,400,000 45%     87,030,000 Total Net Income after tax and distribution 106,370,000 174,060,000 If rate of return on equity is higher than investor rate of return they fetch then lower distribution is better otherwise higher is suggested

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