YIELDCO is subject to a jurisdiction operating a classical tax system. The company pays taxes on its income at the 35% corporate tax rate. The company’s shareholder clientele pays taxes on dividends at 40% and on capital gains at 28%.

(a) Suppose that the company’s taxable income is €1.00 per share and it pays out all after-tax income to its shareholders. What proportion of the taxable income would shareholders receive net of all taxes? Assume that the realization of any capital gains is in the same year.

(b) If the company pays no dividends and the shareholders realize the resulting capital gains in the same year, what proportion of the taxable income net of all taxes do the shareholders enjoy?

(c) In the circumstances, which of the two dividend policies would be preferable?