John is in a high income-tax bracket and wishes to minimize current taxes payable.He also has a sizeable current income and prefers high growth rates to significant annual cash flow from his equity investments.Which of the following dividend polices would John most likely prefer if we assume that the dividend policy has no impact on the value of the firm and that the capital gains tax rate is lower than the ordinary tax rate?

Question

Quizplus · Accepted Answer

John is in a high income-tax bracket and prefers high growth rates to significant annual cash flow from his equity investments. Therefore, he would most likely prefer a no-dividend-payout policy. This way, he would not have to pay taxes on the dividends received, and instead, the company can reinvest the earnings to fuel growth and increase the value of the shares. As the capital gains tax rate is lower than the ordinary tax rate, John can benefit from a capital gain in the future when he sells the shares, and the tax payable would be lower.

John Is in a High Income-Tax Bracket and Wishes to Minimize