Master Limited Partnerships
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Until 1987 Master Limited Partnerships (MLPs) were treated as partnerships for tax purposes. This meant that no corporate taxes were paid by the entity. Instead, taxes were paid by partners (at their individual tax rates) on entity profits (both distributed and undistributed). The marginal tax rate for corporations in 1987 was 34 percent, compared to 33 percent for individuals in the highest tax bracket.
a. If an entity distributes all after-tax earnings as dividends and generates before-tax earnings of $10 million, what would be the distribution to owners (after entity and personal taxes) if it is organized as (1) a corporation and (2) an MLP?
b. What would be the optimal capital structure for the MLP discussed in (a)? Justify your answer.
c. What types of dividend policy do you expect the MLP to follow? Why?
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- BBA, University of Rajasthan
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