Assume that the legislators are looking at enacting a new tax law, almed at getting companies to pay out more of their earnings 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? O None Debt ratio should remain unchanged O Debt ratios should go up over time, as companies pay more dividends O Debt ratios should go down over time.

Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter17: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
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Assume that the legislators are looking at enacting a new tax law, aimed 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
159% tax rate on earnings paid out as dividends. What effect will this have on corporate financing behavior?
O None. Debt ratio should remain unchanged
O Debt ratios should go up over time, as companies pay more dividends
O Debt ratios should go down over time.
Transcribed Image Text:Assume that the legislators are looking at enacting a new tax law, aimed 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 159% tax rate on earnings paid out as dividends. What effect will this have on corporate financing behavior? O None. Debt ratio should remain unchanged O Debt ratios should go up over time, as companies pay more dividends O Debt ratios should go down over time.
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