Question

During the year, Success Ltd shares have increased from $8 to $9 and shareholders received a final dividend of 50 cents per share, fully franked at the company tax rate of 30 per cent. Calculate the dividend yield after personal taxes for shareholders with a tax rate of 47 per cent (using the beginning of the year share price) on Success shares.

A. 6.25%
B. 4.7%
C. 5%
D. 6.7%

Answer 1

The fact is that on the dividends the company has already paid taxes to a certain extent, that is, 30%.

Hence, the grossed up dividend is as under:

Net Dividends Gross Up (Net/0.7) 0.50 0.71

Now on the total dividends, the revenue needs 47% taxes (personal tax rate), hence the differential will be paid by shareholders as under:

Taxable (Gross *47%) Pre-Paid (Gross X 30%) Net Payable 0.34 0.21 0.12

This would be recovered from the shareholders leaving with them the dividend realised as under:

Dividends Received Тax Payable Net Realisation 0.50 0.12 0.38

Hence the yield on the initial share price of $8 works out to 4.7% (Option B) as under:

Yield 4.7%