ls who are taxed more heavily on dividends than capital gains. In the U.S, they are double taxed. The dividends come out of post tax corporate profits and are also subject to personal tax. This is less extreme in the U.K where only Investors with the highest rates of personal tax are subject to further tax on dividends received. The importance of tax can be seen in the bond market, interest on municipal bonds are not taxed, therefore are sold at low pre-tax yields. However, other bonds that are taxed are sold at higher pre-tax yields. Investors that are heavily taxed would prefer to hold zero yields and they would not want to hold stocks on days they pay dividends. Since they pay less on capital gains made from stock repurchases.There is further tax advantage with share repurchases. There is deferred tax payment, while taxes on dividends have to be paid immediately. Considering those taxed more heavily on dividends, and financial institutions that are indifferent, the company would do well to cut dividends with repurchase stock.Q.4 The recommendation to James Broadhead should fully explain the importance of the dividend policy and its consequences. Dividends are an additional expense or a loss of funds for a company. The firm's board of directors sets them but they are not compulsory. Payments have to be to all stockholders who are registered on a particular record date. Dividend policy can be seen as the trade off between retained earning and paying cash. But in such a case why managers should choose to pay dividends, as they are not compulsory? Can a reduction in retained earnings damage investments or can a reduction in dividends harm the value of the company? For these two questions there are three groups of people who believe something totally different. The first group believes that an increase in dividends increases the value of the firm. The second group believes that dividend policy makes no real difference so it does not af...
