When a firm retains cash, it pays corporate tax on the interest it earns and the investor will owe capital gains tax on the increased firm value-in essence the interest on retained cash is taxed ________.

Question

Quizplus · Accepted Answer

Retained cash is taxed twice: once on the corporate level as corporate tax on the interest earned by the firm, and once on the investor level as capital gains tax on the appreciation of firm value.

When a Firm Retains Cash, It Pays Corporate Tax on the Interest