regarding the tax treatment of payments to securities holders, it is true that _

Question

regarding the tax treatment of payments to securities holders, it is true that _____.

a. common stock dividends and preferred stock dividends are not tax –deductible, while interest is tax – deductible

b. interest and preferred stock dividends are tax – deductible, while common stock dividends are not tax deductible

c. interest and preferred stock dividends are not tax – deductible, while common stock dividends are tax deductible

d. common stock dividends and preferred stock dividends are tax- deductible, while interest is not tax - deductible

Explanation / Answer

Correct option (a)

Stock dividends are not tax-deductible, but interest payments are. This is a reason why firms opt for debt financing.

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