Question

If dividends are fully franked, what does the shareholder receive? What is the formula for calculating this?

Option 1: Shareholder receives the dividend with a tax credit. Formula: Dividend * (1 + Tax Rate)

Option 2: Shareholder receives the dividend without any tax credit. Formula: Dividend * (1 - Tax Rate)

Option 3: Shareholder receives the dividend with a tax credit. Formula: Dividend / (1 - Tax Rate)

Option 4: Shareholder receives the dividend without any tax credit. Formula: Dividend / (1 + Tax Rate)

Answer 1

When dividends are fully franked, the shareholder receives the dividend with a tax credit, indicative of the tax already paid by the company. The correct calculation is represented by Option 1, using the formula Dividend * (1 + Tax Rate) to determine the total amount received, including the tax credit.

Step-by-step explanation:

If dividends are fully franked, it means that the shareholder receives the dividend along with a tax credit. This credit represents the tax the company has already paid on its profits before distributing these to shareholders. The correct option and formula for calculating the amount that a shareholder receives, including the tax credit, is Option 1: The shareholder receives the dividend with a tax credit. The formula for this calculation is: Dividend * (1 + Tax Rate). For example, if a company issues a dividend of $0.75 per share with a corporate tax rate of 30%, for someone owning 85 shares, the grossed-up dividend would be calculated as follows: $0.75 * (1 + 0.30) = $0.975 per share. Hence, for 85 shares, the shareholder would receive 85 * $0.975 = $82.875 in total.