Because the dividend tax will be paid whether the firm pays the cash immediately or retains cash and pays the interest over time, the dividend tax rate does not affect the cost of retaining cash.

Question

Quizplus · Accepted Answer

The cost of retaining cash is based on the opportunity cost of not investing the cash in projects that would generate a higher return than the cost of capital. The dividend tax rate does not affect this opportunity cost and therefore does not affect the cost of retaining cash.

Because the Dividend Tax Will Be Paid Whether the Firm