# Corporate Finance

David Drakar and Leslie O’Rourke both own 100 shares of stock in a German corporation that makes €1.00 per share in pre-tax income. The corporation pays out all of its income as dividends. Drakar is in the 30% individual tax bracket while O’Rourke is in the 40% individual tax bracket. The tax rate applicable to the corporation is 30%. Drakar and O’Rourke live in the United Kingdom, which uses an imputation tax system for corporate dividends. What is the effective tax rate on the dividend for each shareholder, assuming no effects from the exchange rate? Drakar O’Rourke A) 40% 48% B) 38% 44% C) 30% 40%

C?

Earnings before tax = 100 Earnings after tax = 70 Dividend received by investor = 70 Credit allowed under imputation system = 30 O’Rourke tax = 70*.4 = 28 - 30 = -2 Drakar tax = 70*.3 = 21 - 30 = -9

I also think it is C. The imputation tax system has a tax credit so that you end up paying the tax rate of your domestic country, so they each pay their own invididual tax rate.

C