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

This statement is false because firms that use dividends and firms that use share repurchases will have the same after-tax return for a given pre-tax return. The after-tax return for investors is based on the total payout from the firm (dividends plus any capital gains resulting from share repurchases), not on whether the firm uses dividends or share repurchases to distribute payouts to shareholders.

Which of the Following Statements Is FALSE