The optimal dividend policy when the dividend tax rate ________the capital gain tax rate is to pay ________ dividends.
A) exceeds; more
B) exceeds; no
C) exceeds; less
D) below; no

Question

Quizplus · Accepted Answer

When the dividend tax rate exceeds the capital gain tax rate, it is optimal to pay no dividends. This is because paying dividends would result in higher taxes for shareholders compared to capital gains, which are taxed at a lower rate. By retaining earnings, the company can pursue growth opportunities and increase the value of the company, which will ultimately benefit shareholders through higher stock prices and future dividends.

The Optimal Dividend Policy When the Dividend Tax Rate ________The