1. Corporations are exempt from paying taxes on 70% of the dividends they receive from their stock holdings in other companies, whereas they have to pay a tax rate of 35% on capital gains. If all the stock in your company is held by other companies, and the ordinary tax rate for companies is 35%
Dividends have a tax advantage relative to capital gains
Capital gains have a tax advantage relative to dividends
Dividends and capital gains are taxed at the same rate
Explain.
2. Pension funds are exempt from paying taxes on either ordinary income or capital gains and also have substantial ongoing cash flow needs. What types of stocks would you expect these funds to buy?
Stocks that pay high dividends
Stocks that pay no or low dividends
Explain
3. In countries where stockholders have little or no control over incumbent managers, you would expect dividends paid by companies to be
Lower than dividends paid in other countries
Higher than dividends paid in other countries
About the same as dividends paid in other countries
4. For which of the following types of firms would a stock buyback be most likely to lead to a drop in the stock price?
Companies with a history of poor project choice
Companies that borrow money to buy back stock
Companies that are perceived to have great investment opportunities
Explain.