Explain How Personal Taxes Influence Investment Choices

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The Answer is In general,investors prefer retained earnings over a cash dividend (or share repurchase)if expected returns,adjusted for their premiums due to risk,satisfy the condition: (1 - T_C)

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(pre-tax return within the corporation)> (after personal tax return outside the corporation)Otherwise,investors prefer the cash dividend (or share repurchase).The entire left side of the inequality is simply the project's return,computed as is usually done from after-corporate tax cash flows,whereas the right side is the product of the return of the tracking portfolio.A tax-exempt investor will want the corporation to make the same real investment choices,regardless of whether the investment is funded from retained earnings,which would otherwise be paid out as a dividend,or with a new equity issue.Tax-exempt and tax-paying shareholders agree about which projects a firm should fund from external equity issues,but may disagree about which projects should be financed from retained earnings.

Explain How Personal Taxes Influence Investment Choices

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