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Tax differential view ( of dividend policy)

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Definition of Tax differential view ( of dividend policy)

Tax Differential View ( Of Dividend Policy) Image 1

Tax differential view ( of dividend policy)

The view that shareholders prefer capital gains over dividends,
and hence low payout ratios, because capital gains are effectively taxed at lower rates than dividends.



Related Terms:

After-tax profit margin

The ratio of net income to net sales.


After-tax real rate of return

Money after-tax rate of return minus the inflation rate.


Agency cost view

The argument that specifies that the various agency costs create a complex environment in
which total agency costs are at a minimum with some, but less than 100%, debt financing.


Asymmetric taxes

A situation wherein participants in a transaction have different net tax rates.


Average tax rate

taxes as a fraction of income; total taxes divided by total taxable income.


Bankruptcy cost view

The argument that expected indirect and direct bankruptcy costs offset the other
benefits from leverage so that the optimal amount of leverage is less than 100% debt finaning.


Bankruptcy view

The argument that expected bankruptcy costs preclude firms from being financed entirely
with debt.


Tax Differential View ( Of Dividend Policy) Image 2

Before-tax profit margin

The ratio of net income before taxes to net sales.


Break-even tax rate

The tax rate at which a party to a prospective transaction is indifferent between entering
into and not entering into the transaction.


Capital market imperfections view

The view that issuing debt is generally valuable but that the firm's
optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net
corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of
asymmetric information, asymmetric taxes, and transaction costs.


Cash dividend

A dividend paid in cash to a company's shareholders. The amount is normally based on
profitability and is taxable as income. A cash distribution may include capital gains and return of capital in
addition to the dividend.


Cash flow after interest and taxes

Net income plus depreciation.


Collection policy

Procedures followed by a firm in attempting to collect accounts receivables.


Corporate tax view

The argument that double (corporate and individual) taxation of equity returns makes
debt a cheaper financing method.


Corporate taxable equivalent

Rate of return required on a par bond to produce the same after-tax yield to
maturity that the premium or discount bond quoted would.


Cum dividend

With dividend.


Tax Differential View ( Of Dividend Policy) Image 3

Cumulative dividend feature

A requirement that any missed preferred or preference stock dividends be paid
in full before any common dividend payment is made.


Deferred taxes

A non-cash expense that provides a source of free cash flow. Amount allocated during the
period to cover tax liabilities that have not yet been paid.


Depreciation tax shield

The value of the tax write-off on depreciation of plant and equipment.


Differential disclosure

The practice of reporting conflicting or markedly different information in official
corporate statements including annual and quarterly reports and the 10-Ks and 10-Qs.


Differential swap

Swap between two LIBO rates of interest, e.g. yen LIBOR for dollar LIBOR. Payments are
in one currency.


Discounted dividend model (DDM)

A formula to estimate the intrinsic value of a firm by figuring the
present value of all expected future dividends.


Dividend

A dividend is a portion of a company's profit paid to common and preferred shareholders. A stock
selling for $20 a share with an annual dividend of $1 a share yields the investor 5%.


Dividend clawback

With respect to a project financing, an arrangement under which the sponsors of a project
agree to contribute as equity any prior dividends received from the project to the extent necessary to cover
any cash deficiencies.


Dividend clientele

A group of shareholders who prefer that the firm follow a particular dividend policy. For
example, such a preference is often based on comparable tax situations.


Dividend discount model (DDM)

A model for valuing the common stock of a company, based on the
present value of the expected cash flows.


Dividend growth model

A model wherein dividends are assumed to be at a constant rate in perpetuity.


Dividend limitation

A bond covenant that restricts in some way the firm's ability to pay cash dividends.


Dividend payout ratio

Percentage of earnings paid out as dividends.


Dividends per share

Amount of cash paid to shareholders expressed as dollars per share.


Dividend policy

An established guide for the firm to determine the amount of money it will pay as dividends.


Dividend rate

The fixed or floating rate paid on preferred stock based on par value.


Dividend reinvestment plan (DRP)

Automatic reinvestment of shareholder dividends in more shares of a
company's stock, often without commissions. Some plans provide for the purchase of additional shares at a
discount to market price. dividend reinvestment plans allow shareholders to accumulate stock over the Long
term using dollar cost averaging. The DRP is usually administered by the company without charges to the
holder.


Dividend rights

A shareholders' rights to receive per-share dividends identical to those other shareholders receive.


Dividend yield (Funds)

Indicated yield represents return on a share of a mutual fund held over the past 12
months. Assumes fund was purchased 1 year ago. Reflects effect of sales charges (at current rates), but not
redemption charges.


Dividend yield (Stocks)

Indicated yield represents annual dividends divided by current stock price.


Dividends per share

dividends paid for the past 12 months divided by the number of common shares
outstanding, as reported by a company. The number of shares often is determined by a weighted average of
shares outstanding over the reporting term.


Double-tax agreement

Agreement between two countries that taxes paid abroad can be offset against
domestic taxes levied on foreign dividends.


Earnings before interest and taxes (EBIT)

A financial measure defined as revenues less cost of goods sold
and selling, general, and administrative expenses. In other words, operating and non-operating profit before
the deduction of interest and income taxes.


Equivalent taxable yield

The yield that must be offered on a taxable bond issue to give the same after-tax
yield as a tax-exempt issue.


Extra or special dividends

A dividend that is paid in addition to a firm's "regular" quarterly dividend.


Ex-dividend

This literally means "without dividend." The buyer of shares when they are quoted ex-dividend
is not entitled to receive a declared dividend.


Ex-dividend date

The first day of trading when the seller, rather than the buyer, of a stock will be entitled to
the most recently announced dividend payment. This date set by the NYSE (and generally followed on other
US exchanges) is currently two business days before the record date. A stock that has gone ex-dividend is
marked with an x in newspaper listings on that date.


Fiscal policy

The use of government spending and taxing for the specific purpose of stabilizing the economy.


Foreign tax credit

Home country credit against domestic income tax for foreign taxes paid on foreign
derived earnings.


Forward differential

Annualized percentage difference between spot and forward rates.


Homemade dividend

Sale of some shares of stock to get cash that would be similar to receiving a cash dividend.


Imputation tax system

Arrangement by which investors who receive a dividend also receive a tax credit for
corporate taxes that the firm has paid.


Indicated dividend

Total amount of dividends that would be paid on a share of stock over the next 12 months
if each dividend were the same amount as the most recent dividend. Usually represent by the letter "e" in
stock tables.


Interest equalization tax

tax on foreign investment by residents of the U.S. which was abolished in 1974.


Interest tax shield

The reduction in income taxes that results from the tax-deductibility of interest payments.


Investment tax credit

Proportion of new capital investment that can be used to reduce a company's tax bill
(abolished in 1986).


Limited-tax general obligation bond

A general obligation bond that is limited as to revenue sources.


Liquidating dividend

Payment by a firm to its owners from capital rather than from earnings.


Marginal tax rate

The tax rate that would have to be paid on any additional dollars of taxable income earned.


Monetary policy

Actions taken by the Board of Governors of the Federal Reserve System to influence the
money supply or interest rates.


Pecking-order view (of capital structure)

The argument that external financing transaction costs, especially
those associated with the problem of adverse selection, create a dynamic environment in which firms have a
preference, or pecking-order of preferred sources of financing, when all else is equal. Internally generated
funds are the most preferred, new debt is next, debt-equity hybrids are next, and new equity is the least
preferred source.


Perfect market view (of capital structure)

Analysis of a firm's capital structure decision, which shows the
irrelevance of capital structure in a perfect capital market.


Perfect market view (of dividend policy)

Analysis of a decision on dividend policy, in a perfect capital
market environment, that shows the irrelevance of dividend policy in a perfect capital market.


Personal tax view (of capital structure)

The argument that the difference in personal tax rates between
income from debt and income from equity eliminates the disadvantage from the double taxation (corporate
and personal) of income from equity.


Policy asset allocation

A long-term asset allocation method, in which the investor seeks to assess an
appropriate long-term "normal" asset mix that represents an ideal blend of controlled risk and enhanced
return.


Progress review

A periodic review of a capital investment project to evaluate its continued economic viability.


Progressive tax system

A tax system wherein the average tax rate increases for some increases in income but
never decreases with an increase in income.


Residual dividend approach

An approach that suggests that a firm pay dividends if and only if acceptable
investment opportunities for those funds are currently unavailable.


Short-term tax exempts

Short-term securities issued by states, municipalities, local housing agencies, and
urban renewal agencies.


Signaling view (on dividend policy)

The argument that dividend changes are important signals to investors
about changes in management's expectation about future earnings.


Special dividend

Also referred to as an extra dividend. dividend that is unlikely to be repeated.


Split-rate tax system

A tax system that taxes retained earnings at a higher rate than earnings that are
distributed as dividends.


Stock dividend

Payment of a corporate dividend in the form of stock rather than cash. The stock dividend
may be additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders.
Stock dividends are often used to conserve cash needed to operate the business. Unlike a cash dividend, stock
dividends are not taxed until sold.


Taking a view

A London expression for forming an opinion as to where market prices are headed and acting on it.


TANs (tax anticipation notes)

tax anticipation notes issued by states or municipalities to finance current
operations in anticipation of future tax receipts.


Tax anticipation bills (TABs)

Special bills that the Treasury occasionally issues that mature on corporate
quarterly income tax dates and can be used at face value by corporations to pay their tax liabilities.


Tax books

Set of books kept by a firm's management for the IRS that follows IRS rules. The stockholder's
books follow Financial Accounting Standards Board rules.


Tax clawback agreement

An agreement to contribute as equity to a project the value of all previously
realized project-related tax benefits not already clawed back to the extent required to cover any cash
deficiency of the project.


Tax-exempt sector

The municipal bond market where state and local governments raise funds. Bonds issued
in this sector are exempt from federal income taxes.


Tax free acquisition

A merger or consolidation in which 1) the acquirer's tax basis in each asset whose
ownership is transferred in the transaction is generally the same as the acquiree's, and 2) each seller who
receives only stock does not have to pay any tax on the gain he realizes until the shares are sold.


Tax haven

A nation with a moderate level of taxation and/or liberal tax incentives for undertaking specific
activities such as exporting or investing.


Tax Reform Act of 1986

A 1986 law involving a major overhaul of the U.S. tax code.


Tax shield

The reduction in income taxes that results from taking an allowable deduction from taxable income.


Tax swap

Swapping two similar bonds to receive a tax benefit.


Tax deferral option

The feature of the U.S. Internal Revenue Code that the capital gains tax on an asset is
payable only when the gain is realized by selling the asset.


Tax-deferred retirement plans

Employer-sponsored and other plans that allow contributions and earnings to
be made and accumulate tax-free until they are paid out as benefits.


Tax-timing option

The option to sell an asset and claim a loss for tax purposes or not to sell the asset and
defer the capital gains tax.


Taxable acquisition

A merger or consolidation that is not a tax-fee acquisition. The selling shareholders are
treated as having sold their shares.


Taxable income

Gross income less a set of deductions.


Taxable transaction

Any transaction that is not tax-free to the parties involved, such as a taxable acquisition.


Traditional view (of dividend policy)

An argument that "within reason," investors prefer large dividends to
smaller dividends because the dividend is sure but future capital gains are uncertain.


Two-tier tax system

A method of taxation in which the income going to shareholders is taxed twice.


Value-added tax

Method of indirect taxation whereby a tax is levied at each stage of production on the value
added at that specific stage.


Variable life insurance policy

A whole life insurance policy that provides a death benefit dependent on the
insured's portfolio market value at the time of death. Typically the company invests premiums in common
stocks, and hence variable life policies are referred to as equity-linked policies.


With dividend

Purchase of shares in which the buyer is entitled to the forthcoming dividend. Related: exdividend.


Withholding tax

A tax levied by a country of source on income paid, usually on dividends remitted to the
home country of the firm operating in a foreign country. tax levied on dividends paid abroad.


Dividend

A payment a company makes to stockholders. Earnings before income tax. The profit a company made
before income taxes.


INCOME TAX

What the business paid to the IRS.


Dividend

The payment of after-tax profits to shareholders as their share of the profits of the business for an accounting period.


Earnings before interest and taxes (EBIT)

The operating profit before deducting interest and tax.


Earnings before interest, taxes, depreciation and amortization (EBITDA)

The operating profit before deducting interest, tax, depreciation and amortization.


Profit before interest and taxes (PBIT)

See EBIT.


Dividend income

Income that a company receives in the form of dividends on stock in other companies that it holds.


 

 

 

 

 

 

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