Question
You are a consultant that has been hired to recommend a payout policy for UBT Corp. UBTs shareholders are almost exclusively pension funds and other
You are a consultant that has been hired to recommend a payout policy for UBT Corp. UBTs shareholders are almost exclusively pension funds and other corporations. No shareholder of UBT owns more than 20% of all outstanding shares. You have compiled a table with the current tax rates that different types of investors might face (see below). With the information provided, how would you recommend that UBT structure its payout policy? Assume that taxes are the only market imperfection. Select the best answer.
Investor Type | Tax Rate on Dividends | Tax Rate on Capital Gains |
Buy and hold individual investor | 20% | 0% |
One-year individual investor | 20% | 20% |
Pension fund | 0% | 0% |
Corporation with less than 20% ownership | 10.5% | 21% |
I. | The firm should only repurchase shares. | |
II. | The firm should pay dividends and repurchase shares in equal amounts. | |
III. | How the firm structures its payout policy is irrelevant because investors are indifferent between dividends and repurchases. | |
IV. | The firm should only use dividends. |
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