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Unformatted text preview: nvestors in these firms typically view such payments favorably. There are some academics
and practitioners who argue that dividends are good and can increase firm value and provide
at least three reasons.
2 In early 2003, President Bush presented tax reform that essentially exempted all dividends from personal taxes. After negotiations, a compromise bill was ultimately passed in May 2003 reducing the tax rate on
dividends to 15% - the same rate that capital gains will be taxed at. 17
q q q Some investors like dividends. These investors may not be paying much in taxes and
consequently do not care about the tax disadvantage associated with dividends. Or they
might need and value the cash flow generated by the dividend payment. Why do they
not sell stock to raise the cash they need? The transactions costs and the difficulty of
breaking up small holdings3 and selling unit shares may make selling small amounts of
stock infeasible. Given the vast diversity of individual and institutional investors in the
market, it is not surprising that, over time, stockholders tend to invest...
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- Spring '11