Advanced Corporate Finance Coursework Example | Topics and Well Written Essays - 1000 words

Advanced Corporate Finance - Coursework Example Differential tax treatments are the causes for less than one dividend drop ratios (DDR). Thus, through their research on the relationship between taxes and a firm’s decisions, they articulate that in a rational market, the ex-dividend cutoff should reflect the value of capital gains and dividends to a marginal shareholder. However, when tax enters into the investors’ decisions, the fall in share price in the ex-dividend should show the price of the post value capital gains relative to the post value of dividends. Therefore, because of the influence of tax differential rates, on the capital gains and dividends, the DDR will be less than one because of the fall dividend values due to higher taxation as a result of the effect of personal taxes (Elton, Gruber, & Blake, 2005). Therefore, this impact will influence the firm’s decision in terms of contributions to capital gains and dividends. There are other factors that like tax influences the decisions of a firm to ei ther pay dividends or capital gains. The availability of growth opportunities for investment requires that firms plow back their profits to invest in projects with positive NPVs as illustrated by the signaling hypothesis lieu of paying or increasing their dividend payout, which sends a negative signal to the investors. The stability of earnings is another factor. Firms that have constant earnings are likely to pay out dividends unlike firms with lower or unstable earnings whose dividend payout is likely to result in the decline of growth of their earnings.