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Unformatted text preview: simply because you will have to pay more in
taxes. For dividends to not matter, you either have to no taxes or pay the same taxes on
dividends and capital gains.
The assumptions needed to arrive at the proposition that dividends do not affect
value may seem so restrictive that you will be tempted to reject it without testing it; after all,
it is not costless to issue new stock and dividends and capital gains have historically not
been taxed at the same rate. That would be a mistake, however, because the theory does
contain a valuable message for investors: A firm that invests in poor projects that make substandard returns cannot hope to increase its value to investors by just offering them higher
dividends. Alternatively, a firm with great investments may be able to sustain its value even
if it does not pay any dividends.
Dividends are bad: The Tax Argument
Dividends have historically been treated less favorably than capital gains by the tax
authorities in the United States. For much of the last century, dividends have been treated as
ordinary income and taxed at rates much higher than price appreciation,...
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This note was uploaded on 01/17/2012 for the course ECON 101 taught by Professor Econnorm during the Spring '11 term at Art Institutes Intl. Minnesota.
- Spring '11