Question

WRITE A PAPER ADDRESSING THE FOLLOWING:   

1. Do you agree with the statement "The U.S. Tax Code encourages companies to pay a large percentage of their net income in the form of dividends? Why?
2. Why do you think investors invest in stocks that pay no dividends? Support your reasoning with a specific example of a firm that pays no dividend.

PLEASE, PROVIDE ONE REFERENCE

Answer 1

No, I disagree with the statement that the US tax code encourages Companies to pay a large percentage of their net income in the form of dividends. In fact, the tax code encourage the tax savings which is much better option than payment of dividends because its non - tax deductible. Therefore, firm may use more debt and pay interest instead of dividends.

There are varied requirements of investors
One look for intermittent cashflows from their investment.
One look for capital appreciation over a longterm. So the second category of investors Invest in non dividend paying stocks. If the company’s return on capital employed is more than the rate of your return which u get on dividend income then it is best to invest in non dividend paying stock. For example the company return on capital employed is 13 percent. And the company doesn’t declare dividend And the same amount is reinvested into business u will get 13 percentage return compounding every year

If your rate of return (suppose one of the source of saving to common man is fd) at it gives maximum of 8.5 percent.Then it is better to forego dividend.

Amazon, a great example who follow the policy of no dividend. The profits which not paid as dividends is reinvested back into business which expands rapidly and increase the profits further making the stock more attractive to buy and hence shoots up its prices. Various companies follow the policy of expanding sales and have hegemony on product servicing. It would be more efficient on part of investors to invest in Amazon stock ( no dividend stock)