Suppose the personal tax rate on dividend income increases. All else equal, one would expect the
cost of equity for high-dividend ﬁrms to decrease.

Question

Quizplus · Accepted Answer

The statement is incorrect - the cost of equity for high-dividend firms is likely to increase as a result of the higher tax rate on dividend income. This is because investors will demand a higher dividend yield to compensate for the increased tax burden, which in turn will increase the cost of equity.

Suppose the Personal Tax Rate on Dividend Income Increases