Share repurchases are often more tax-efficient than declaring dividends because Question 8 options: a) companies can reduce their taxable income by reducing the number of shares outstanding b) only shareholders who sell their stock are taxed on any resulting capital gain c) the ordinary income tax rate on buybacks is often lower than the long-term capital gains tax rate on dividends d) B and C are correct e) None of the options are correct

The correct answer is:b) only shareholders who sell their stock are taxed on any resulting capital…

Answered: Share repurchases are often more…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Which is not a benefit of debt to the corporation?a. interest payments are tax deductibleb. when debt is used heavily, it increases stock valuec. In periods of inflation, debt is paid back with amounts that are worth less than the ones borrowed.d. compared to equity, debts have a lower cost of capitale. answer not given
4. Which of the below statements is false about the Static Tax Clientele Theory of payout policy? Investors with high capital gains tax relative to marginal income tax prefer cash dividends An individual company cannot increase its value by changing its payout policy Companies with high dividend payout rates attract investors with relatively low tax rates There is a static equilibrium where companies with low dividend payout rates attract investors with relatively high tax rates None of the above
12
Please fully explain
Choose option a,b,c,d,e for the following: Question 4 - Your income is exempt from taxes. Considering this fact, which of the following is true? a. You will always prefer your firm to retain its earning and grow faster so that you can enjoy capital gains. b. You will always choose your stocks bases on whether they offer a high or a low dividend payout. c. You will always go for low dividend – high growth stocks. d. You will want to invest in tax free government bonds. e. You will be indifferent between receiving dividends or capital gains.
(b) Modigliani-Miller theory argues that both capital structure and dividend policy are irrelevant in the absence of transaction costs and taxes. How does the inclusion of taxes affect; (i) Capital structure theory? (ii) Dividend Policy?
Assume that the tax on dividends and the tax on capital gains is the same. All else equal, what would a prudent investor prefer? A. More information is needed. B. The prudent investor would prefer dividends—a dollar today is always worth more than a dollar to be received in the future. C. The prudent investor would be indifferent between receiving dividends or capital gains. D. The prudent investor would prefer capital gains—the capital gain tax liability can be deferred until gains are realized.
Stock options: Multiple Choice have value only if the market price of the stock declines. have value only if the market price of the stock rises. are taxed at ordinary rates. do not qualify for favorable tax treatment.
4. Classify each of the following factors/cases based on whether they favor a low dividend policy or high dividend policy? (explain why) A. The tax on capital gains is deferred until the gain is realized. B. Few, if any, positive net present value projects are available to a firm. C. A majority of the shareholders have a low tax rate. D. A majority of the shareholders have better investment opportunities than the firm. E The presence of an agency conflict with the company's senior managers.
Which statements are true?1. [S1] Preference shares are considered a hybrid type of financing because dividends paid to preference shareholders are tax deductible. [S2] Cumulative preference shares require the payment of dividends but the timing of payment may be adjusted according to the wishes of the board of directors.2. [S1] By executing a rights offering, we acknowledge the preemptive right of current ordinary shareholders. [S2] When an initial public offering has been made, the underwriter would remit to the issuing entity cash equal to the total issue price less any issuance cost chargeable against the former. 3. [S1] When the entity issues a long-term debt instrument, it exposes itself to solvency risk. [S2] When the board of directors agreed to regularly issue stock dividends, it faces liquidity risk.
1. How many of the following is/are advantage(s) of issuing bonds to raise capital? (A) Does not require interest payment when the entity is incurring severe losses; (B) Generally requires fixed interest payments which can easily be used in budgeting; (C) Interest is a tax-deductible expense.2. How many of the following is/are advantage(s) of issuing ordinary shares to raise capital? (A) No contractual obligation to pay dividends; (B) Presence of easily determinable maturity date; (C) Dividends are tax-deductible expenses.3. Which is true in these statements? Share warrants are often attached to debt instruments to entice creditors to also become ordinary shareholders especially when the entity would be unable to pay interests. [S2] An entity needing a large sum of financing would prefer issuing bonds with share warrants over bonds with conversion rights.4. Which is true in these statements? [S1] When unrelated traders buy and sell stocks, the entity which issued the shares will be…
Modigliani and Miller Proposition II states that: the optimal capital structure occurs when the marginal cost of distress equals the marginal benefit of interest tax shields the cost of cost of levered equity is equal to the cost of unlevered equity, in the absence of taxes, since the value of the levered firm equals the value of the unlevered firm. the capital structure if the firm is irrelevant, regardless of the corporate tax rate. the cost of levered equity is equal to the cost of unlevered equity plus a premium that is proportional to the (market value) debt-to-equity ratio

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