Question

Which one of the following is NOT an argument in favor of a low dividend policy?

Select one:

A. Shareholders hate the uncertainty arising from future dividends.

B. Corporate tax rates exceed personal tax rates.

C. A majority of stockholders have other investment opportunities that offer higher rewards with similar risk characteristics.

Answer 1

A.If shareholders hate the uncertainty arising from future dividends, it is best to keep a low dividend policy which can be maintained in the future and have lower uncertainty associated with it. So this option is incorrect.

B. If corporate tax rates exceed personal tax rates then the shareholders woulnd not want the dividends to be taxed at the higher corporate tax rate, instead would prefer paying tax on capital gain when share value increases. So this option is incorrect

C. If A majority of stockholders have other investment opportunities that offer higher rewards with similar risk characteristics, they would prefer getting a higher dividend and therefore low dividend policy wont be desired. So this option is correct.