Business Administration - Financial Planning RFC230 Lecture Notes - Lecture 8: Dividend Tax, Tax Rate

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greenmuskrat329

22 Mar 2017

School

Seneca College

Department

Business Administration - Financial Planning

Course

Business Administration - Financial Planning RFC230

Professor

marysavona

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Document Summary

If held to maturity, return is taxed as interest. If sold prior to maturity, return is taxed as a capital gain. Dividends: paid from after-tax profits (dividends are not tax deductible to a corporation; interest is tax deductible to a corporation) Individuals pay a lower effective tax rate on dividends received from. Canadian corporations due to the dividend tax credit, which was designed to eliminate the double-taxation of dividends (tax credit to the individual should offset tax paid by the corporation on the dividend, but does not always do so) Taxable capital gains: capital gains (losses) arise from the sale of capital property, capital property is property that was acquired for the intended purpose of obtaining long- term or enduring benefits. If losses exceed gains, they can be carried back 3 years or forward indefinitely to be deducted against capital gains.

Related Questions

1.Which of the following statements about conversion of income is correct?

converting ordinary income into capital gain is a beneficial tax planning strategy

converting capital gain income into ordinary income is a beneficial tax planning strategy

converting qualifying dividends into interest income is a beneficial tax planning strategy

holding assets that will generate a capital gain inside a retirement plan is a beneficial tax planning strategy

2. Which of the following statements is NOT a true statement regarding long-term capital assets?

capital assets that are held for more than one year are treated as long-term

no distinction is made between capital losses and ordinary losses

with few exceptions, the maximum capital gains tax rate is 15%

the benefit of holding a capital asset long enough to garner long-term capital gain treatment must be weighed against the financial risk associated with a possible decline in value during the holding period

3. Which of the following statements about the taxation of dividends is correct?

all dividends are taxed at the same rate as applicable to capital gains

dividends paid by credit unions and mutual insurance companies qualify for the lower tax rate

qualifying dividends are taxed at a maximum 15% rate

d. there is no tax benefit to changing some of an individual's funds from a lower-yielding fixed income investment into a dividend-paying stock

4. Which of the following is an advantage of making an IRC Section 83(b) election with respect to restricted stock?

an 83(b) election can be made any time within the tax year of the transfer of shares from the company to the employee

if the stock is forfeited, the compensation recognized and the taxes paid are deductible as losses

any future appreciation would be taxed as capital gain instead of taxable compensation

d. the employee does not receive any cash at the time of the stock award to pay the tax on the compensation recognized under the election

5.The maximum alternative minimum tax rate for individuals is:

less than the maximum regular federal income tax rate for individuals

equal to the maximum regular federal income tax rate for individuals

greater than the maximum regular federal income tax rate for individuals

d. going to decrease each year by 1% until it reaches 20% in 2010

6. How is alternative minimum taxable income (AMTI) for individuals computed?

AMTI = taxable income + adjustments + preferences - exemptions

AMTI = taxable income - adjustments + preferences - exemptions

AMTI = taxable income +/- adjustments + preferences - exemption

d. AMTI = taxable income +/- adjustments - preferences - exemptions

7. Which of the following statements regarding the calculation of alternative minimum taxable income (AMTI) for corporations versus the calculation of AMTI for individuals is accurate?

	a.	AMTI is calculated the same for both corporations and individuals
	b.	an additional step is required for corporations based on their adjusted current earnings
	c.	the exemption amount for corporations is not subject to phaseout to phaseout while the exemption amounts for individuals are
	d.	thethere is no adjustments to taxable income for corporations, only preferences

Which of the following statements is CORRECT?
a. Assume that two bonds have equal maturities and are of equalrisk, but one bond sells at par while the other sells at a premiumabove par. The premium bond must have a lower current yield and ahigher capital gains yield than the par bond.
b. A bondâs current yield must always be either equal to its yieldto maturity or between its yield to maturity and its couponrate.
c. If a bond sells at par, then its current yield will be less thanits yield to maturity.
d. If a bond sells for less than par, then its yield to maturity isless than its coupon rate.
e. A discount bondâs price declines each year until it matures,when its value equals its par value.

redmammoth172

Assume all bonds in these problems are semi-annual bonds with $1000 par value 1. Calculate the yield to maturity for the following corporate bond

Company(Ticker) Coupon Maturity Last Price Merck (MRK) 4.375 April 15, 2031 98.211

2. US Treasury Strips are zero-coupon securities. Suppose you wish to purchase a US Treasury Strip that matures exactly 10 years from now. If the yield on 10-year US Treasury securities is currently 2.40%, what is the correct price quote for this bond? (Use semi- annual compounding).

3. A corporate bond has a coupon rate of 5.5% and a yield to maturity of 4.905%. You buy the bond when it is quoted at 102.10 percent of par. It has been 75 days since the last coupon payment was made. How much must you pay, per bond?

4. RJ Wagner Insurance Co. preferred stock pays a cash dividend of $2.00 per share, per year. The current price of this stock is $51.95. What is the yield on this preferred? Suppose an individual is considering investing in this preferred stock, versus a AAA-rated municipal bond that has a yield to maturity of 2.195%. Which has the higher after tax yield if the investor pays 45% of her income in state and federal income taxes, and the municipal bond interest is tax exempt?

5. Heavy Metal Corporation is expected to generate Free Cash Flow of $75 million in the current year. The free cash flow is expected to grow at a 3% rate forever. Heavy Metal has 20 million shares outstanding, $400 million in debt and no excess cash. The tax rate is 40%, the required return on equity is 12%, and the WACC (cost of capital) is 9%. Compute the Enterprise Value of Heavy Metal and the value of the equity per share.

6a) IBM Corp. earned $12.25 in EPS last year. IBM has recently adopted a long-term target to pay out 50% of all future earnings as dividends. IBMâs dividends and earnings are expected to grow at a constant rate of 3% in the future. You require a 9% rate of return on stock investments of similar risk. What is your estimate of the market value of IBM stock?

6b). Based on the information provided what is the implied return on new investment (ROE*) for IBM.

7. Bunge Corp. earned $9.75 per share and paid $3.25 in dividends in the year just ended. Bungeâs (trailing) P/E ratio is 15.0. If Bunge dividends are expected to grow at a 5% rate forever, what is the expected rate of return on Bunge stock?

8. Monsanto, Corp paid dividends of $8.80 last year. You develop the following forecast for Monsantoâs future dividends: growth of 20% for 2 years, growth of 10% in years 3, 4 and 5, and growth of 5% per year, forever, after year 5. If investors required return on Monsanto stock is 15%, what is the estimated market value according to the multi-stage dividend discount model?

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Business Administration - Financial Planning RFC230 Lecture Notes - Lecture 8: Dividend Tax, Tax Rate

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