Question

Question 29

Because of the tax laws of the 1960s and 1970s, when dividends were taxed more heavily than capital gains, shareholders preferred that corporations:

	a.	keep free cash flows for investment in acquisitions.
	b.	distribute capital gains regularly.
	c.	pay dividends annually.
	d.	increase managerial salaries.

Answer 1

Ans: (A) Keep free cash flows for investment in acquisitions.

During the tax regime of the 1960s and 1970s, the dividends which the shareholders earned in their stock invited a huge amount of taxes more than what was taxed on the capital gains. So what shareholders preferred that companies keep their free cash flows for investments in acquisitions rather than distributing them as dividends because the very basic reason that the capital gains accruing from investments will be taxed at lower rates than gross income.