Which of the following statements is CORRECT? A. One advantage of dividend reinv

Question

Which of the following statements is CORRECT? A. One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive. B. If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not adhere strictly to the residual dividend model. C. If a firm adheres strictly to the residual dividend model, then, holding all else constant, its dividend payout ratio will tend to rise whenever its investment opportunities improve. D. If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios. E. Despite its drawbacks, following the residual dividend model will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.

Explanation / Answer

1)

Interest receipts are taxable but dividends receipts are not taxable. COmpanies pay dividend tax and normal tax, so tax will not be levied on the dividends. This enacourages and enable the investors to reinvest their dividend cash flows.

Hence, this statement is correct.

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