z@rocksvax.UUCP (06/19/85)
There are many people who invest in corporations with large capital gain
potential because of the tax advantage you mentioned. But there are also
a large number of investors who invest in stocks purely because they provide
a steady return on investment. The wealthy retiree is a primary example.
These people depend on a consistent payment of dividends as their income.
A steady dividend is an important feature of a stock. Another important factor
in a stock's price is the income per share. Thus it may be advantageous
for a corporation to borrow money even while paying steady dividends. For
example let us say a corporation earns $2M per year on an investment base of
$10M ($1 par value stock). If all the $10M came from stock the corporation
would be producing a income per share of $.20. But if $5M was borrowed
at say 10% (an old loan!) then $.5M would go to loan service leaving $1.5M
income to be spread among the 5M outstanding shares or an income per
share of $.30!
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//Z\\
James M. Ziobro
Ziobro.Henr@Xerox.COM
{rochester,amd,sunybcs,allegra}!rocksvax!z