Stephanie Is the Sole Shareholder and President of Hawk Corporation

Essay

Stephanie is the sole shareholder and president of Hawk Corporation. She feels that she can justify at least a
$220,000 bonus this year because of her performance. However, rather than a bonus in the form of a salary, she plans to have Hawk pay her a $220,000 dividend. Because Stephanie's marginal tax rate is 32%, she prefers to receive a dividend taxed at 15%. Her accountant, however, suggests a $275,000 bonus in lieu of the $220,000 dividend since Hawk Corporation is in the 21% tax bracket. Should Stephanie take the $220,000 dividend or the
$275,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Hawk and to
Stephanie.