Question

Please show me on excel.

Interest versus dividend income Last year, Shering Corporation had pretax earnings from operations of $490,000. In addition, it received $20,000 in income from interest on bonds it held in Zig Manufacturing and received $20,000 in income from dividends on its 5% common stock holding in Tank Industries, Inc. Shering faces a flat 21% tax rate and is eligible for a 50% dividend exclusion on its Tank Industries stock.

1. Calculate the firm’s tax on its operating earnings only.

2. Find the tax and the after-tax amount attributable to the interest income from Zig Manufacturing bonds.

3. Find the tax and the after-tax amount attributable to the dividend income from the Tank Industries, Inc., common stock.

4. Compare, contrast, and discuss the after-tax amounts resulting from the interest income and dividend income calculated in parts b and c.

5. What is the firm’s total tax liability for the year?

Answer 1

Operating income	490,000
Tax rate	21%
Tax liability (a)	102,900
After tax operating income	387,100
After tax operating income/ Total operating income	79%
Non-operating income
Interest on bonds (Zig)	20,000
Tax rate	21%
Tax liability (b)	4,200
After tax interest income	15,800
After tax interest income/ Total interst income	79%
Dividend income (Tank)	20,000
Dividend exclusion rate	50%
Excluded dividend	10,000
Taxable dividend	10,000
Tax rate	21%
Tax liability (c)	2,100
After tax dividend income	7,900
Total dividend income (After-tax+ excluded)	17,900
After tax dividend income/ Total dividend income	90%
Total tax liability (a+b+c)	109,200

As can be seen clearly from the above calculation, the after tax income from dividends is larger than that from the interest. This is because of the 50% tax exclusion on dividend income. This is called as the tax advantage