Question

Why might a firm's investors wish to delay receiving cash from the firm? (250 words please)

Answer 1

Every firm and company requires funds for its operations and these funds are arranged through various sources such as; loans from financial instituitons, fianance through bonds, funds through debentures and funds through common stocks & preferred stock etc.

All these parties are investors in the firm & company and these all parties want regular & steady returns on their invested money. Such returns may be in form of interest or dividends. So normally we see that as per time value of money concept every investor will wish to receive cash as early as possible because after some time same cash money will not have same worth as it have today. But it is also true that sometime some investors wish to delay receiving cash from the firm due to some reasons. As we know that every investors need to pay taxes on their eranings and such taxes are need to be paid at the time of receipts of dividends or interests that is why at the time of receiving cash from firm investors have to pay taxes. So investors may wish to delay cash receipt from firm.

There is another reason too. As we know that there are fixed tax brackets for the taxpayers and as per these tax brackets rate of taxes changes. So if an investors is a particular low tax bracket and want to remain in that tax bracket then income of such taxpayer should be in such tax bracket limit otherwise taxpayer will be shifted to higher tax bracket. Thus investors wish to delay receiving cash from the firm due to keeping himself in the lower tax bracket so that tax liability can be kept low. Suppose an investor earned some income and is in a specific tax bracket and if taxpayer receive any amount of more income then he will be shifted to upper tax bracket then such taxpayer will wish to delay receiving cash from the firm so that higher tax liability can be saved.