Because the dividend tax will be paid whether the firm pays cash immediately or retains cash and pays the interest over time,the dividend tax rate does not affect the cost of retaining cash.

Question

Quizplus · Accepted Answer

The cost of retaining cash is based on the opportunity cost of not investing that cash in projects that generate a higher return. The dividend tax rate does not affect this opportunity cost, as it is a separate issue. Therefore, the dividend tax rate does not affect the cost of retaining cash.

Because the Dividend Tax Will Be Paid Whether the Firm