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Assume that the legislators are looking at enacting a new tax law, almed at getting companies to pay out more of their earnings as dividends.
Assume that the legislators are looking at enacting a new tax law, almed at getting companies to pay out more of their earnings as dividends. As part of this law.companies will pay two different tax rates on net income a 35% tax rate on retained earnings and a 15% tax rate on earnings paid out as dividends. What effect will this have on corporate financing behavior? None Debt ratio should remain unchanged O Debt ratios should go up over time, as companies pay more dividends Debt ratios should go down over time
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