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Basic Question 3 of 7
Which of the following investors have the strongest tax reason to prefer dividends over capital gains?
B. Financial institutions
C. Individuals
D. Corporations
A. Pension funds
B. Financial institutions
C. Individuals
D. Corporations
User Contributed Comments 7
| User | Comment |
|---|---|
| drago | Because of the 80% DRD (examption of dvds for tax) |
| rockeR | I dont understand this because according to notes, investors prefer the capital gain rather than payout becoz of lower tax on capital gain. Am I wrong? |
| setmefree | what's wrong with pension funds? |
| katybo | Pension funds would be indifferent according to the reading. Individuals would prefer capital gains cause they can defer taxes. Corporations not clear to me. |
| Done | The reason why corporations is that they receive a 70% deduction on dividends not 80%. However Bush has changed a lot of things with the tax code so this could be higher. I learned about this from the Series 7 |
| quynhnk79 | what does 70%/80% deduction means in this case? is it the tax deduction for individual who receive dividend or for the companies who pay out the dividend? Neither supports the answer. Who can help me? Please! |
| achu | Corporations receving a dividend from other companies they invest in (Say, company A owns stock in company B), only pay tax on 20 or 30% of the dividend income (used to be 30%, as 70% was exempt). The idea is to offset 'triple taxation' to investors in Company A. Otherwise, dividends from Company B get taxed, then taxed agiain when the dividend goes to company A, and then the company A investor gets taxed again. |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
explain factors that affect dividend policy in practice;
calculate and interpret the effective tax rate on a given currency unit of corporate earnings under double taxation, dividend imputation, and split-rate tax systems;
CFA® 2025 Level II Curriculum, Volume 3, Module 16.