8. Dividend Policy [LO2] For initial public offerings of common
stock, 2017 was a slow year, with about $24.53 billion raised by
the process. Relatively few of the 108 firms involved paid cash
dividends. Why do you think that most chose not to pay cash
dividends?
Use the following information to answer the next two
questions:
Historically, the U.S. tax code treated dividend payments
made to shareholders as ordinary income. Thus, dividends were
taxed at the investor's marginal tax rate, which was as high as 38.6
percent in 2002. Capital gains were taxed at a capital gains tax
rate, which was the same for most investors and fluctuated through
the years. In 2002, the capital gains tax rate stood at 20 percent. In
an effort to stimulate the economy, President George W. Bush
presided over a tax plan overhaul that included changes in
dividend and capital gains tax rates. The new tax plan, which was
implemented in 2003, called for a 15 percent tax rate on both
dividends and capital gains for investors in higher tax brackets.
For lower-tax bracket investors, the tax rate on dividends and
capital gains was set at 5 percent through 2007, dropping to zero in
2008.
