petersen@ucbvax.ARPA (David A. Petersen) (06/11/85)
Assume a corporation holds onto its earnings rather than paying dividends.
This means the value of its stock will increase to reflect this. Ideally,
it would increase by the same amount as the earnings per share, but maybe
not.
In any case, not only would the shareholders save the difference in
interest between borrowing and lending, but if the stock is held for 6 months
it is considered as capital gains and taxed at a maximum effective rate of
20% (17.5% under Reagan's tax plan). Since 60% of the capital gain is not taxed
you end up saving a lot of taxes over what would be paid if you received
dividends.
I can't believe everyone isn't taking advantage of this if it is
legal. Therefore it must be illegal. My question is: why?
Paul Bradleywmartin@brl-tgr.ARPA (Will Martin ) (06/12/85)
> Assume a corporation holds onto its earnings rather than paying dividends. > This means the value of its stock will increase to reflect this. Ideally, > it would increase by the same amount as the earnings per share, but maybe > not. > {Info about tax savings here from capital gains instead of income} > Paul Bradley Perhaps the reason why this isn't done is because the market isn't logical. The price/value of a stock maybe SHOULD go up by the same amount as the accumulated earnings held per share, but nothing will MAKE it do so. After all, takeover artists continually look for "undervalued" stocks -- where the stock price is less than the assets-per-share value; if the price really did reflect the accumulations and earnings, there would NEVER be any such "undervalued" stocks! The fact that they are there proves that the market price is driven more by mystery and supposition than by solid fact. Also, of course, many people buy stocks for the purpose of collecting the income while holding the principal inviolate, plus what they might gain from the appreciation of the stock value. If the dividends were not distributed, these people wouldn't want to buy those stocks. Thus there is less of a demand for them, so their price would fall somewhat, if the old "supply and demand" principle means anything... This would directly counteract the supposed RISE in price due to holding earnings. Besides, held earnings will probably go to top management as bonuses and perks. (:-) Will