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Apla Student Question X af/servlet/quiz? n-takeQuiz&quiz probGuid-QNAPCOA80101000000425f8dd00e00008tck-m 1536064672639 OAAA6804016506240 New Tab Periadontist Garland di 11. The tax system Understanding taxes Which source of investor income is susceptible to double taxation? O Dividends O Interest earned You bought 1,000 shares of Tund Corp. stock for $82.35 per share and sold it for $68.12 per share after a few years. How will your gain ar loss be treated when you file your taxes? O As a capital loss deducted from taxable income in the year that the loss is realized O As a capital gain taxed at the current ordinary-income tax rate O As a capital loss deducted from current taxable income O As a capital gain taxed at the long-term tax rate Suppose you want to invest $10,000. You have two options: (1) Invest in California municipal bonds with an expected rate of return of 12.00%, or (2) invest in J and K Corp. 's bonds with an expected rate of return of 16.20%. Assume that your decision is based on a tax perspective. If everything else is the same for both bonds, at what tax rate would you be indifferent between these two bonds? 22.04% 32.41% 25.93% 23.34% According to a tax law established in 1969, taxpayers must pay the or regular tax. of the Alternative Minimum Tax (AMT)

Explanation / Answer

Part 1: Answer is Dividends

Dividends are susceptible to double taxation. First the operating profit is taxed at the company level, and then the dividends are paid from net income. Dividends received by shareholders may again be taxed at the shareholders' hand and hence can be taxed twice.

Interest earned by shareholder is not susceptible to double taxes. The company on the interest they pad would rather receive a tax shield and would be taxed only at the hands of receiver.

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Part 2: Option A

Clearly, investor incurs a capital loss here. He bought at a higher price and is selling them at a lower price. Now, these realized losses are deducted from the taxable income in the year the loss is realized.

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Part 3: 25.93%

Municipal bonds are tax-free investment instruments whereas corporate bond yields are subject to taxes. Tax rate at which an investor will be indifferent between two can be calculated as:

So, Municipal bond yield = Corp bond yield * (1 - Tax Rate)

12% = 16.20% * (1 - Tax Rate)

(1 - Tax Rate) = 0.7407

Tax Rate = 25.93%

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Part 4: Answer is $1.67

Dividend is paid out of net (or post tax) income. Maximum dividend that a company can pay is the net income.

Pretax Income * (1 - Tax Rate) = Net Income

Now, if company pays 100% of net income as dividends.

Pretax Income * (1 - 40%) = $1

Pretax Income = $1/60%

Pretax income = $1.67

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