management%20notes[1] - Government and Finance Q What is...

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Government and Finance Q: What is double taxation of dividends? A: Corporate earnings are taxed first and then any dividends paid out to individuals are taxed Just like an individual that pays income tax and then pays sales taxes if that money is spent buying something. Q: Without regard to tax policy, how are businesses supposed to decide whether to return earnings or pay out dividends? What types of companies are more likely to pay out dividends? A: If a firm can earn a better return by re investing the money in the company that can be earned by the investor (say putting the money in a money market account) Companies that have slower steadier growth rates pay dividends (e.g. apple/google) in more volatile but rewarding environments are more likely to retain earnings. Q: Why does the double taxation policy favor bond financing vs equity financing? Outside of tax policy what is an advantage of equity financing? A: Since firms can deduct the amounts paid out in interests on bonds, this gives bond financing a tax advantage. An advantage of equity financing is that there is a built-in premium because investors are willing to take some risk to share in the greater rewards potentially realized through capital gains. Q: Consider that the tax rate for a person’s short term capital gain on a sale of stock can be as high as
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management%20notes[1] - Government and Finance Q What is...

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