In order to avoid double taxation and to escape the frequently higher tax rate applied to capital gains,stockholders generally prefer to have corporations pay dividends rather than to retain their earnings and reinvest the money in the business.Thus,earnings should be retained only if the firm needs capital very badly and would have difficulty raising it from external sources.

Question

Quizplus · Accepted Answer

This statement is incorrect. Stockholders may actually prefer that a company retain earnings and reinvest them in the business if they believe it will lead to future growth and higher stock prices. The decision of whether to distribute dividends or retain earnings depends on various factors including the company's growth opportunities, financial needs, and shareholder preferences.

In Order to Avoid Double Taxation and to Escape the Frequently