New Business Is Just Being Formed by 10 Investors, Each

question 22

Multiple Choice

New Business is just being formed by 10 investors, each of whom will own 10% of the business. The firm is expected to earn $1,000,000 before taxes each year. The corporate tax rate is 35% and the personal tax rate for the firm's investors is 38%. The firm does not need to retain any earnings, so all of its after-tax income will be paid out as dividends to its investors. The investors will have to pay personal taxes on whatever they receive. How much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation?

• A) $20,015
• B) $20,424
• C) $20,841
• D) $21,266
• E) $21,700

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Definitions:

Antitrust Sanctions

Penalties imposed on businesses or individuals for violating antitrust laws, intended to promote fair competition and prevent monopolistic practices.

Price Signalling

A mechanism where the price of a good or service provides information to buyers and sellers which influences their decisions.

Cartels

An association of independent firms or countries that agree to coordinate their production and pricing decisions to monopolize a market and maximize collective profits.

Collusive Agreement

A secret or illegal cooperation or conspiracy, especially between competitors, aimed at deceiving or gaining an unfair advantage in the market.