Problem:
Dividends have been in the news often due to the fact that government would provide tax benefits to dividend paying companies. Technology companies typically pay low or no dividends since they reinvest cash flows in research and development to fund future growth. However, as many technology companies mature (e.g. Microsoft, Dell, Cisco, Oracle, Intel) and build large cash balances, these companies may begin to develop a policy of paying dividends. The new tax benefits make such a policy even more attractive.
1. Why is the government considering a tax cut on dividends in general?
2. What typically happens to a firm's value when it increases its dividend?
3. What would you expect to happen for a high-tech firm such as Microsoft?