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Homework answers / question archive / Kristen, the president and sole shareholder of Egret Corporation, has earned a salary bonus of $154,000 for the current year
Kristen, the president and sole shareholder of Egret Corporation, has earned a salary bonus of $154,000 for the current year. Because of the lower tax rates on qualifying dividends, Kristen is considering substituting a dividend for the bonus. Assume that the tax rates are 24% for Kristen and 21% for Egret Corporation. Round your answers to nearest dollar, if required. a. How much better off would Kristen be if she were paid a dividend rather than salary? If Kristen were paid a bonus, she would receive $ after taxes. If Kristen receives a dividend rather than salary, she would receive $ after taxes. Thus, she would be better off by receiving the b. How much better off would Egret Corporation be if it paid Kristen a salary rather than a dividend? The net after-tax cost of the bonus for Egret Corporation would be $ and the net after-tax cost for the dividend would be $ Therefore, Egret would be better off by $ if it paid the c. Assume Egret Corporation paid Kristen a salary bonus of $200,200 instead of a $154,000 dividend. If Egret Corporation were to pay Kristen a salary bonus of $200,200 instead of a $154,000 dividend, Kristen would receive $ after taxes. The bonus would cost Egret Corporation $ after taxes. d. What should kristen do? Both Egret Corporation and Kristen are better off with the
| Part 1) |
| The amount of payment received by Kristen under both scenarios is determined as below: |
| Net Bonus = Amount of Salary Bonus - Tax on Salary Bonus = 154,000 - 24%*154,000 = $117,040 |
| Net Amount of Dividend = Dividend Amount - Tax on Dividend = 154,000 - 15%*154,000 = $130,900 |
| Therefore, Kristen would be better off by $13,860 (130,900-117,040) more if she were paid a dividend. |
