The Effect That Differential Taxation of Dividends and Capital Gains

question 133

Multiple Choice

The effect that differential taxation of dividends and capital gains has on investors is that it:

• A) creates a bias against dividend payment.
• B) creates a bias against transactions costs.
• C) creates a tax shelter effect for firms that pay dividends.
• D) creates a bias against retention of earnings.

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Definitions:

Cash Dividends

Payments made by a company out of its profits to its shareholders in the form of cash.

Investing Activities

Financial transactions related to the acquisition or disposal of long-term assets and investments.

Investing Activities

Transactions involving the acquisition or disposal of non-current assets like property, plant, and equipment, or securities, which are part of a company’s cash flow statement.

Cash Dividends

Payments made by a corporation to its shareholder members, distributing a portion of the company's earnings.