Corporations can raise capital using either debt (and must pay interest) or equity (and are expected to pay dividends). However, the interest expense is tax deductible while dividends paid cannot be deducted. How much pre-tax income must a company with a tax rate of 35% need to earn per share to pay out $2.15 per share in dividends?
Corporations can raise capital using either debt (and must pay interest) or equity (and are expected to pay dividends). However, the interest expense is tax deductible while dividends paid cannot be deducted. How much pre-tax income must a company with a tax rate of 35% need to earn per share to pay out $2.15 per share in dividends?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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14
Transcribed Image Text:Corporations can raise capital using either debt (and must pay interest) or equity (and are expected to pay
dividends). However, the interest expense is tax deductible while dividends paid cannot be deducted. How
much pre-tax income must a company with a tax rate of 35% need to earn per share to pay out $2.15 per
share in dividends?
Your answer should be between 1.57 and 6.12, rounded to 2 decimal places, with no special characters.
Expert Solution
Given information:
Dividend per share is $2.15.
The tax rate is 35%.
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