Question

Which of the following statements about dividend is NOT true? Bird-in-the-hand theory says that investors think dividends are less risky than potential future capital gains, so they like dividends. Tax preference theory indicates that low dividend payments mean higher capital gains. Capital gains taxes are lower than dividend taxes, and they can be deferred. So investors prefer low-dividend-payments or non-dividend-payments firms. Based on the Bird-in-the-hand theory, a firm should set low dividend payout ratio to increase firm value. Based on the Tax preference theory, a firm should pay less dividends to increase firm value.

Answer 1

The statement that is not true about dividends is:

Capital gains taxes are lower than dividend taxes, and they can be deferred

Step-by-step explanation:

Dividends is the money paid to investors and shareholders from the profit the company they invested in has made within a period of time.

Dividends can be earned from investing in stocks, mutual funds or exchange-traded funds and it is a taxable income.

Capital gains on the other hand are the incremental amount of value appreciation an asset accrues when it is purchased and after it is sold. This accrued earnings is also a taxable income.

The tax information is included in Schedule B, Form 1040.

Capital gains taxes are not lower than dividend taxes because the U.S. tax code gives treats dividends and capital gains the same.