Question: Kraftstoff of Germany. Kraftstoff is a German-based company that manufactures electronic fuel-injection carburetor assemblies for several large automobile companies in Germany, including Mercedes, BMW, and Opel. The firm, like many firms in Germany today, is revising its financial policies in line with the increasing degree of disclosure required by firms that wish to list their shares publicly in or out of Germany. Kraftstoff's primary problem is that the German corporate income tax code applies a different income tax rate to income depending on whether it is retained (45%) or distributed to stockholders (30%).
a. If Kraftstoff planned to distribute 50% of its net income, what would be its total net income and total corporate tax bills?
b. If Kraftstoff was attempting to choose between a 40% and 60% payout rate to stockholders, what arguments and values would management use in order to convince stockholders which of the two payouts is in everyone's best interest?