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Unformatted text preview: Transaction costs might be one reason why its comparatively cheaper to
payout dividends. However, it does not follow that any particular firm can benefit by increasing its
dividends. The high dividend clientele already have plenty of high dividend stock to choose from. Download free ebooks at bookboon.com
72 Corporate Finance Corporate ﬁnancing and valuation 8.11.6 Why dividend policy may decrease firm value Please click the advert The third view on dividend policy states that low dividends will increase value. The main argument is that
dividend income is often taxed, which is something MM-theory ignores. Companies can convert dividends
into capital gains by shifting their dividend policies. Moreover, if dividends are taxed more heavily than
capital gains, taxpaying investors should welcome such a move. As a result firm value will increase, since
total cash flow retained by the firm and/or held by shareholders will be higher than if dividends are paid.
Thus, if capital gains are taxed at a lower rate than di...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.
- Spring '12