Final answer:
The most correct statement is a misconception; retained earnings do not represent cash available for dividends. Capital gains are taxed upon realization, not necessarily at the highest rate. Dividends are not deductible from corporate taxes, thus disfavoring equity financing in this regard.
Step-by-step explanation:
The most correct statement among the options given is that retained earnings on the balance sheet do not represent the cash available to pay out as dividends. Retained earnings are part of the equity on a company's balance sheet and represent the amount of net income left over for the business after it has paid out dividends to shareholders. However, this figure is not an indicator of cash availability, as it includes earnings that have been reinvested in assets or used to pay off liabilities.
With regards to capital gains taxes, they are only paid when the gain is realized, meaning when the asset is sold. However, they may not necessarily be taxed at the top individual tax rate, as there are different tax rates depending on the length of time the asset was held and other factors.
Lastly, the corporate tax system does not favor equity financing in terms of dividends because dividends are not deductible from corporate taxes. This creates a double taxation situation where the corporation pays taxes on its profits, and the shareholders also pay taxes on the dividends they receive, which are paid out of those post-tax profits.