Assume personal tax rates are lower than corporate tax rates.From a tax-paying shareholder point of view,how should a firm spend its excess cash once it has funded all positive net present value projects?

Question

Quizplus · Accepted Answer

If personal tax rates are lower than corporate tax rates, it makes sense for the firm to repurchase shares as it will increase the value of the remaining shares for the shareholders. Additionally, it will also reduce the number of outstanding shares and increase the earnings per share, which may lead to higher dividends in the future. Acquiring another firm or purchasing financial assets may not be the best option as it may not add much value to the firm. Increasing executive compensation may not be ethical, and increasing cash dividends may not be tax-efficient for the shareholders. Therefore, repurchasing shares is the best option.

Assume Personal Tax Rates Are Lower Than Corporate Tax Rates