John Is in a High Income-Tax Bracket and Wishes to Minimize

question 20

Multiple Choice

John is in a high income-tax bracket and wishes to minimize current taxes payable.He also has a sizeable current income and prefers high growth rates to significant annual cash flow from his equity investments.Which of the following dividend polices would John most likely prefer if we assume that the dividend policy has no impact on the value of the firm and that the capital gains tax rate is lower than the ordinary tax rate?

• A)High-dividend-payout policy
• B)No-dividend-payout policy
• C)Low-dividend-payout policy
• D)John would be indifferent to all of the dividend policies.

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Definitions:

Order Of Decreasing Liquidity

A ranking of assets on a balance sheet based on their ease of conversion to cash without loss of value.

Order Of Importance

A principle of organization where information is prioritized and arranged according to its significance.

Cash Flow To Creditors

The sum of money paid to creditors during a period, which includes both interest payments and repayments of principal.

Interest

The cost incurred for the benefit of borrowing cash, often articulated as an annual percentage rate.