Hi all,
was wondering if you can help with the question below. I fail to see how this is relevant. my undrestanding is that tax shield is a debt financing advantage to the company and not the investors. how would different tax rates for dividends make any difference in term of tax shield?
THANKS IN ADVANCE!
Question:
" Statement 1: Favorable tax rates on dividend income relative to interest income will reduce the value of the tax shield provided by debt in the static trade-off theory of capital structure. "
Answer:
"Epler’s first statement is correct. Miller (of Modigliani and Miller) concluded that if investors face different tax rates on dividend and interest income, the advantage for debt financing may be reduced somewhat. This conclusion is supported by international capital structure differences as countries with favorable dividend tax rates tend to use less debt in their capital structure. "