An Australian company earns a pretax profit of $10 per share. The company pays a

Question

An Australian company earns a pretax profit of $10 per share. The company pays a 30% corporate tax and pays ,the remaining $7 in dividends to a shareholder in 40% the bracket. Under the imputation tax system, what is the amount of personal tax that ne shareholder must pay for the $7 dividend that he receives? Zero A$1.00 A$4.00 A$2.10 A$0.90 Learn and Earn Company is financed entirely by common stock that is priced to offer a 20% expected return. If the company repurchases 50% of the stock and substitutes an equal value of debt yielding 8%, what is the expected return on the common stock after refinancing?

Explanation / Answer

Amount of Personal Tax that the share Holder Must Pay = Dividend * TPE/(1-Tc) -  Dividend *Tc/(1-Tc)

Amount of Personal Tax that the share Holder Must Pay = 7*40%/(1-30%) - 7*30%/(1-30%)

Amount of Personal Tax that the share Holder Must Pay = A$ 1

Answer

B) A$ 1

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