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How would changes in the following impact a firm's payout ratio?

1) How would each of the following changes tend to affect aggregate (that is, the average for all corporations) payout ratios, other things held constant? Explain your answers.

a. An increase in the personal income tax

b. A liberalization of depreciation for federal income tax purposes?that is, faster tax write offs

c. A rise in interest rates

d. An increase in corporate profits

e. A decline in investment opportunities

f. Permission for corporations to deduct dividends for tax purposes as they now do interest charges

g. A change in the Tax Code so that both realized and unrealized capital gains in any year were taxed at the same rate as dividends

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1) How would each of the following changes tend to affect aggregate (that is, the average for all corporations) payout ratios, other things held constant? Explain your answers.

a. An increase in the personal income tax
Decrease the payout ratios
An increase in personal income tax rates means that the dividends are taxed more heavily at the investor level. The investors would prefer capital gains -which would be taxed at a lower rate- rather than receive income in the form of dividends.

b. A liberalization of depreciation for ...

Solution Summary

This solution provides answers to questions on an increase in the personal income tax, a liberalization of depreciation for federal income tax purposes (faster tax write offs), a rise in interest rates, an increase in corporate profits, a decline in investment opportunities, permission for corporations to deduct dividends for tax purposes as they now do interest charges, and a change in the Tax Code so that both realized and unrealized capital gains in any year were taxed at the same rate as dividends would impact payout ratios.

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