Discuss the following topic: "Should the reduced tax rate on dividends affect a multinational firm's capital structure?"A multinational firm's capital structure decision is affected by a number of factors. They can be grouped in two categories: (1) Corporate characteristics, and (2) Country characteristics.Some of the more common firm-specific characteristics that affect the multinational firm's capital structure are, stability of multinational firm's cash flows, multinational firm's credit risk, multinational firm's access to retained earnings, multinational firm's guarantees on debt, and multinational firm's agency problems.Specific country characteristics that can influence a multinational firm's choice of equity versus debt financing are stock restrictions in host country, interest rates in host country, strength of host country currencies, country risk in host countries, and tax laws in host countries.
Instructions:
1- To read the point and counter-point of this argument and express your own opinion on this topic :
A dividend income tax reduction may encourage a U.S.-based multinational firm to offer dividends to its shareholders or to increase the dividend payment. This strategy reflects an increase in the cash flows of the multinational firm. To offset these outflows, the multinational firm may have to adjust its capital structure. For example, the next time that it raises funds, it may prefer to use equity rather than debt so that it could free up some cash outflows (the outflows to cover dividends would be less than outflows associated with debt).
The change in the tax law reduces the taxes that investors pay on dividends. It does not change the taxes paid by the multinational firm. Thus, it should not affect the capital structure of the multinational firm.