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.

Would would an investor prefer to receive a distribution as a repurchase (capital gain)?     Answers: Lower tax rate on dividends than capital gains   Higher tax rate on dividends than capital gains   Greater certainity   Greater uncertainity

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

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.

11) hy are capital gains typically taxed at a lower rate than income? Select an answer: It is difficult to calculate capital gains. Other taxes provide enough revenue for the government. People pay enough taxes already. The government wants people to invest.

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