Asked by Meadow Smith on May 22, 2024
Verified
A valid reason for a firm to reduce or eliminate its cash dividends is if the tax laws have recently changed such that dividends are taxed at an investor's marginal rate while capital gains are tax exempt.
Cash Dividends
Payments made by a corporation to its shareholders out of its profits or reserves in the form of cash.
Tax Laws
are the legal rules and regulations governing how individuals, businesses, and other entities are taxed by the government.
Capital Gains
The profit from the sale of a capital asset, such as stocks or real estate, over its purchase price.
- Know the financial implications of changing dividend policies based on taxes and investment opportunities.
Verified Answer
SK
Sivakrishna KolliMay 22, 2024
Final Answer :
True
Explanation :
If tax laws change so that dividends are taxed at an investor's marginal rate while capital gains are tax exempt, firms might reduce or eliminate cash dividends to favor capital gains, which would be more tax-efficient for investors.
Learning Objectives
- Know the financial implications of changing dividend policies based on taxes and investment opportunities.
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