Final answer:
Discussing the logic behind a company issuing dividends when dividends are more heavily taxed than capital gains, considering dividends and capital gains as two forms of investor returns. The practice of paying dividends followed by a right issue might seem contradictory due to tax implications and transaction costs but could align with corporate strategy.
Step-by-step explanation:
The statement that a company acting illogically by issuing dividends when dividends are taxed more heavily than capital gains is worth discussing. Investors receive a return on investment in two main ways: through dividends, which are direct payments, or through the appreciation of the stock's value, resulting in a capital gain when sold at a higher price. Stable companies often pay out consistent dividends, but if these dividends are heavily taxed, the attractiveness of the stock to investors might be lower compared to capital gains, which may be taxed at a lower rate.
Furthermore, if a company issues new stock through a right issue shortly after paying dividends, it might seem counterintuitive because the company is effectively giving out cash only to ask for more cash back from shareholders. However, this could be part of a strategic financial maneuver or investment opportunity the company is seeking. In addition, transaction costs also play a role, as issuing new shares and paying dividends both involve costs that can diminish the overall return to investors.