Question

What is meant by "double taxation of dividends"?

According to the Gordon growth model, an increase in the required return on equity...

a		increases the future value of the stock.
b		reduces the current dividend.
c		reduces the expected growth rate of the dividend.
d		reduces the value of a stock.

Answer 1

Double taxation of dividends is the double taxation that occurs when income is taxed first at the enterprise level and again when it is distributed as dividends.

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The correct choice is d : - Reduces the value of stock

Explanation : - In the stable model or the multistage growth model , the value of stock decreases as the required return on equity increases. In the stable model , value of stock = d / r- g.

let d = 2 , r = 0.10 and g = 0.04

value of stock = 33.33

when r = 0.11 and g = 0.04 , value of stock = 28.57

Thus we see that value of stock decreases as the required return on equity increases