A Parent Holding Company Sells Shares in Its Subsidiary Such

Multiple Choice

A parent holding company sells shares in its subsidiary such that the parent now owns only 65% of the subsidiary and, thus, the tax returns of the parent and its subsidiary can't be consolidated.The parent receives annual dividends from the subsidiary of $2,500,000.If the parent's marginal tax rate is 25% and if the exclusion on intercompany dividends is 50%, what is the effective tax rate on the intercompany dividends, and how much net dividends are received?

A) 12.5%; $2,187,500
B) 12.5%; $2,135,000
C) 23.8%; $1,905,000
D) 12.5%; $1,750,000
E) 25.0%; $1,650,000