Chapter 11, Problem 27AP

Leona, whose marginal tax rate on ordinary income is 37 percent, owns 100 percent of the stock of Henley Corporation. This year, Henley generates $1 million of taxable income.

1. a. If Henley wants to pay all of its after-tax earnings to Leona as a dividend, calculate the amount of the dividend payment.
2. b. Calculate Leona’s tax due on the dividend computed in part (a), and her after-tax cash flow from the dividend receipt.
3. c. Compute the combined corporate and individual tax burden on Henley’s $1 million of current year income, and the effective combined tax rate on this income.