Question
Which of the following factors might lead a firm to prefer a low dividend payout?
Multiple select question.
Flotation costs
Myopic investors
High earnings per share
Taxes
Multiple select question.
Flotation costs
Myopic investors
High earnings per share
Taxes
Answers
Answer
Myopic investors is incorrect
Answered by
GPT-4o mini
A firm might prefer a low dividend payout due to the following factors:
1. **Flotation costs** - If a firm has high flotation costs associated with raising new equity, it may prefer to retain earnings rather than pay them out as dividends, as issuing new shares can be expensive.
2. **Myopic investors** - If investors are short-sighted and focus on immediate returns rather than long-term growth, a firm may choose to retain earnings to reinvest in the business, rather than distributing dividends, to align with its growth strategy.
3. **Taxes** - If dividends are taxed at a higher rate than capital gains, a firm may prefer to retain earnings and generate growth, which can be more favorable for shareholders in terms of tax liability.
**High earnings per share** is generally not a reason for preferring a low dividend payout directly, as high EPS can actually provide the firm with the ability to pay higher dividends if desired. Thus, it typically does not influence the preference for retaining earnings.
In summary, the factors that might lead a firm to prefer a low dividend payout are **flotation costs, myopic investors,** and **taxes**.
1. **Flotation costs** - If a firm has high flotation costs associated with raising new equity, it may prefer to retain earnings rather than pay them out as dividends, as issuing new shares can be expensive.
2. **Myopic investors** - If investors are short-sighted and focus on immediate returns rather than long-term growth, a firm may choose to retain earnings to reinvest in the business, rather than distributing dividends, to align with its growth strategy.
3. **Taxes** - If dividends are taxed at a higher rate than capital gains, a firm may prefer to retain earnings and generate growth, which can be more favorable for shareholders in terms of tax liability.
**High earnings per share** is generally not a reason for preferring a low dividend payout directly, as high EPS can actually provide the firm with the ability to pay higher dividends if desired. Thus, it typically does not influence the preference for retaining earnings.
In summary, the factors that might lead a firm to prefer a low dividend payout are **flotation costs, myopic investors,** and **taxes**.
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