Which of the following statements is false?
A) When a firm pays a dividend, shareholders are taxed according to the dividend tax rate. If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate.
B) When the tax rate on dividends exceeds the tax rate on capital gains, shareholders will pay lower taxes if a firm uses share repurchases for all payouts rather than dividends.
C) Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pre-tax return as firms that use share repurchases.
D) The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all.

Question

Quizplus · Accepted Answer

Statement C is false because it misunderstands the tax implications on dividends and share repurchases. If dividends are taxed at a higher rate than capital gains, firms using dividends would actually need to offer a higher after-tax return to match the pre-tax return of firms using share repurchases, not lower.

Which of the Following Statements Is False