Question

AGC Investment Ltd. pays out 70 percent of its earnings in the form of dividends.
Evaluate this policy assuming most stockholders are senior citizens in low tax brackets.
Evaluate this policy assuming most stockholders are in high tax bracket

Answer 1

If the company is paying out 70% of the dividend,it will mean that the company is trying to help the stockholder because most of the stockholder are senior citizen and they will not be having a higher rate of dividend tax so they are in the lower tax brackets and hence it can be said that paying out dividend to them is Highly effective because that will be directly impact in the lives of the shareholders.this will mean that they will have a higher payment to spend because they will be attracting lower taxes.

If the company is paying out 70% dividend and most of the stockholders are in the higher tax category that will mean that dividend is going to attract a higher rate of taxes and paying a dividend is not beneficial because it will be leading to higher rate of taxation for the share holders and they will be left with lesser amount of money and hence it can be said that this is not a proper policy to pay out higher rate of dividend to the shareholders when they are into the higher tax category.

so it can be summarised that dividend should be declared after consideration of the taxation policy because when dividends are attracting a lower rate of taxes,, then a high payout of dividend is always desired and vice versa.