Which of the Following Statements Is FALSE

question 42

Multiple Choice

Which of the following statements is FALSE?

• A) When a firm pays a dividend, shareholders are taxed according to the dividend tax rate. If the firm repurchases shares instead, and shareholders sell shares to create a homemade dividend, the homemade dividend will be taxed according to the capital gains tax rate.
• B) When the tax rate on dividends exceeds the tax rate on capital gains, shareholders will pay lower taxes if a firm uses share repurchases rather than dividends for all payouts.
• C) Firms that use dividends will have to pay a lower after-tax return to offer their investors the same pretax return as firms that use share repurchases.
• D) The optimal dividend policy when the dividend tax rate exceeds the capital gain tax rate is to pay no dividends at all.