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Resource: Principles of Managerial Finance, Ch. 14Complete the Integrative Case 6 O’Grady Apparel Company.Please after reading the chapter, I have highlighted the questions that you need to answer. ONLY THE HIGHLIGHTED SECTION IS MINE TO ANSWER THIS IS A TEAM ASSIGNMENT.d.(1) Assuming that the specific financing costs do not change, what effect would a shift to a more highly leveraged capital structure consisting of 50% long-term debt, 10% preferred stock, and 40% common stock have on your previous findings? (Note: Rework parts b and c using these capital structure weights.)(2) Which capital structure–the original one or this one–seems better? Why?Below is Chapter 1414 Payout PolicyLearning GoalsLG 1 Understand cash payout procedures, their tax treatment, and the role of dividend reinvestment plans.LG 2 Describe the residual theory of dividends and the key arguments with regard to dividend irrelevance and relevance.LG 3 Discuss the key factors involved in establishing a dividend policy.LG 4 Review and evaluate the three basic types of dividend policies.LG 5 Evaluate stock dividends from accounting, shareholder, and company points of view.LG 6 Explain stock splits and the firm’s motivation for undertaking them.Why This Chapter Matters to YouIn your professional lifeACCOUNTING You need to understand the types of dividends and payment procedures for them because you will need to record and report the declaration and payment of dividends; you also will provide the financial data that management must have to make dividend decisions.INFORMATION SYSTEMS You need to understand types of dividends, payment procedures, and the financial data that the firm must have to make and implement dividend decisions.MANAGEMENT To make appropriate dividend decisions for the firm, you need to understand types of dividends, arguments about the relevance of dividends, the factors that affect dividend policy, and types of dividend policies.MARKETING You need to understand factors affecting dividend policy because you may want to argue that the firm would be better off retaining funds for use in new marketing programs or products, rather than paying them out as dividends.OPERATIONS You need to understand factors affecting dividend policy because you may find that the firm’s dividend policy imposes limitations on planned expansion, replacement, or renewal projects.In your personal lifeMany individual investors buy common stock for the anticipated cash dividends. From a personal finance perspective, you should understand why and how firms pay dividends and the informational and financial implications of receiving them. Such understanding will help you select common stocks that have dividend-paying patterns consistent with your long-term financial goals.Whirlpool Corporation Increasing DividendsIn another sign of an improving economy, Whirlpool Corporation, the worldwide appliance manufacturer, announced that it would increase the quarterly dividend that it paid to its stockholders by 25 percent, up to 62.5 cents per share from 50 cents in the previous quarter. Whirlpool’s CEO, Jeff Fettig, explained, “Our actions have delivered a strong financial position enabling us to enhance returns to shareholders through a dividend increase. This dividend increase underscores our confidence that our long-term growth and innovation strategy will continue to create value for our shareholders.” Markets reacted to this news by increasing Whirlpool’s stock price by 3.2 percent.Why does Whirlpool pay dividends? Fettig’s press release suggests two possibilities. One is that by paying dividends the company can “enhance returns” to shareholders. In other words, Whirlpool believes that returns to shareholders will be higher if the firm pays a dividend (and increases it) than if the firm does not pay a dividend. That sounds logical, but consider that when a firm pays a dividend, it is simply taking cash out of its bank account and putting that cash in the hands of shareholders. Presumably, after a firm pays a dividend, its share price will reflect that it no longer holds as much cash as it did prior to the dividend payment. In other words, paying a dividend may simply be just switching money from one pocket (the company’s) to another (the shareholder’s).Another reason that Whirlpool may pay a dividend is revealed in the second part of Fettig’s statement. Whirlpool increased its dividend to “underscore our confidence.” In other words, Whirlpool executives are telling the market that the firm’s financial position is strong enough and its prospects bright enough that managers are confident that they can afford to increase the dividend by 25 percent and still run the company effectively. Indeed, Whirlpool’s history suggests that managers use caution when increasing dividends. From 1995 to 2013, Whirlpool increased its dividend on just three occasions. Compare that record with the dividend history of Emerson Electric Co., a company that as of 2013 had increased its dividend for 54 consecutive years. Apparently Emerson and Whirlpool adopt different policies with respect to dividend increases.14.1 The Basics of Payout PolicyLG 1The term payout policy refers to the decisions that firms make about whether to distribute cash to shareholders, how much cash to distribute, and by what means the cash should be distributed. Although these decisions are probably less important than the investment decisions covered inChapters 10 through 12 and the financing choices discussed in Chapter 13, they are nonetheless decisions that managers and boards of directors face routinely. Investors monitor firms’ payout policies carefully, and unexpected changes in those policies can have significant effects on firms’ stock prices. The recent history of Whirlpool Corporation, briefly outlined in the chapter opener, demonstrates many of the important dimensions of payout policy.payout policyDecisions that a firm makes regarding whether to distribute cash to shareholders, how much cash to distribute, and the means by which cash should be distributed.ELEMENTS OF PAYOUT POLICYDividends are not the only means by which firms can distribute cash to shareholders. Firms can also conduct share repurchases, in which they typically buy back some of their outstanding common stock through purchases in the open market. Whirlpool Corporation, like many other companies, uses both methods to put cash in the hands of their stockholders. In addition to increasing its dividend payout, Whirlpool also resumed its share repurchase program in 2013, which had been halted during the economic recession. At the time of resuming the share repurchase program, the company’s free cash flow was between $600 million and $650 million and expected to increase to between $650 million and $700 million. Whirlpool’s chief executive officier, Jeff Fettig, stated that “sales increased in every region of the world” as the company continued to expand its margins and that as the company continued to execute its “long-term growth strategy . . . [it would] continue to drive actions to further create value for . . . shareholders.”If we generalize the lessons about payout policy, we may expect the following to be true:1. Rapidly growing firms generally do not pay out cash to shareholders.2. Slowing growth, positive cash flow generation, and favorable tax conditions can prompt firms to initiate cash payouts to investors. The ownership base of the company can also be an important factor in the decision to distribute cash.3. Cash payouts can be made through dividends or share repurchases. Many companies use both methods. In some years, more cash is paid out via dividends, but sometimes share repurchases are larger than dividend payments.4. When business conditions are weak, firms are more willing to reduce share buybacks than to cut dividends.TRENDS IN EARNINGS AND DIVIDENDSFigure 14.1 illustrates both long-term trends and cyclical movements in earnings and dividends paid by large U.S. firms that are part of the Standard & Poor’s 500 Stock Composite Index. The figure plots monthly earnings and dividend payments from 1950 through the first quarter of 2013. The top line represents the earnings per share of the S&P 500 index, and the lower line represents dividends per share. The vertical bars highlight ten periods during which the U.S. economy was in recession. Several important lessons can be gleaned from the figure. First, observe that over the long term the earnings and dividends lines tend to move together. Figure 14.1 uses a logarithmic scale, so the slope of each line represents the growth rate of earnings or dividends. Over the 60 years shown in the figure, the two lines tend to have about the same slope, meaning that earnings and dividends grow at about the same rate when you take a long-term perspective. It makes perfect sense: Firms pay dividends out of earnings, so for dividends to grow over the long-term, earnings must grow too.FIGURE 14.1 Per Share Earnings and Dividends of the S&P 500 IndexMonthly U.S. dollar amount of earnings and dividends per share of the S&P 500 index from 1950 through the first quarter of 2013 (the figure uses a logarithmic vertical scale)Second, the earnings series is much more volatile than the dividends series. That is, the line plotting earnings per share is quite bumpy, but the dividend line is much smoother, which suggests that firms do not adjust their dividend payments each time earnings move up or down. Instead, firms tend to smooth dividends, increasing them slowly when earnings are growing rapidly and maintaining dividend payments, rather than cutting them, when earnings decline.To see this second point more clearly, look closely at the vertical bars in Figure 14.1. It is apparent that during recessions corporate earnings usually decline, but dividends either do not decline at all or do not decline as sharply as earnings. In six of the last ten recessions, dividends were actually higher when the recession ended than just before it began, although the last two recessions are notable exceptions to this pattern. Note also that, just after the end of a recession, earnings typically increase quite rapidly. Dividends increase, too, but not as fast.A third lesson from Figure 14.1 is that the effect of the recent recession on both corporate earnings and dividends was large by historical standards. An enormous earnings decline occurred from 2007 to 2009. This decline forced firms to cut dividends more drastically than they had in years; nonetheless, the drop in dividends was slight compared with the earnings decrease.Matter of factP&G’s Dividend HistoryFew companies have replicated the dividend achievements of the consumer products giant Procter & Gamble (P&G). P&G has paid dividends every year for more than a century, and it increased its dividend in every year from 1956 through 2012.TRENDS IN DIVIDENDS AND SHARE REPURCHASESWhen firms want to distribute cash to shareholders, they can either pay dividends or repurchase outstanding shares. Figure 14.2 plots aggregate dividends and share repurchases from 1971 through 2011 for all U.S. firms listed on U.S. stock exchanges (again, the figure uses a logarithmic vertical scale). A quick glance at the figure reveals that share repurchases played a relatively minor role in firms’ payout practices in the 1970s. In 1971, for example, aggregate dividends totaled $21 billion, but share repurchases that year were just $1.1 billion. In the 1980s, share repurchases began to grow rapidly and then slowed again in the early 1990s. The value of aggregate share repurchases first eclipsed total dividend payments in 1998. That year, firms paid $175 billion in dividends, but they repurchased $185 billion worth of stock. Share repurchases continued to outpace dividends for all but three of the next 13 years, peaking at $677 billion in 2007.Whereas aggregate dividends rise smoothly over time, Figure 14.2 shows that share repurchases display much more volatility. The largest drops in repurchase activity occurred in 1974–1975, 1981, 1986, 1989–1991, 2000–2002, and 2008–2010. All these drops correspond to periods when the U.S. economy was mired in or just emerging from a recession. During most of these periods, dividends continued to grow modestly. Only during the recent, severe recession did both share repurchases and dividends fall.FIGURE 14.2 Aggregate Dividends and Repurchases for All U.S.–Listed CompaniesAggregate U.S. dollar amount of dividends and share repurchases for all U.S. firms listed on U.S. stock exchanges in each year from 1971 through 2011 (the figure uses a logarithmic vertical scale)in practice focus on ETHICS: Are Buybacks Really a Bargain?When CBS announced in March 2007 that it would buy back $1.4 billion worth of stock, its sagging share price saw the biggest spike since the media giant parted ways with Viacom in 2005. The 4.5 percent jump may have been an omen of good fortune—at the very least, it showed how much shareholders like buybacks.Companies have been gobbling up their own shares faster than ever in a world of inexpensive capital and swollen balance sheets. Since 2003, the market for buybacks has boomed, with repurchases nearly on a par with capital expenditures. Some, however, have questioned the moves and motives that lead to a big buyback.In addition to simply returning cash to shareholders, many companies also repurchase stock because they believe that their stock is undervalued. New research, however, shows that companies often use creative financial reporting to push earnings downward before buybacks, making the stock seem undervalued and causing its price to bounce higher after the buyback. That pleases investors who then amplify the effect by pushing the price even higher.“Managers who are acting opportunistically can use their reporting discretion to reduce the repurchase price by temporarily deflating earnings,” argue Guojin Gong, Henock Louis, and Amy Sun at Penn State University’s Smeal College of Business. Observing data from 1,720 companies, the authors say companies can easily create an apparent slump by speeding up or slowing down expense recognition, changing inventory accounting, or revising estimates of bad debt, all of which are classic methods of making the numbers look worse without actually breaking accounting rules.The penalty for being caught deliberately managing earnings in advance of a buyback could be severe. With the variety of accounting scandals that popped up regularly in the early 2000s, executives would no doubt be wary of deflating earnings just to get a boost from a buyback. Still, that’s what Louis believes some are doing. “I don’t think what they’re doing is illegal,” he says. “But it’s misleading their investors.”Do you agree that corporate managers would manipulate their stock’s value prior to a buyback, or do you believe that corporations are more likely to initiate a buyback to enhance shareholder value?Combining the lessons from Figures 14.1 and 14.2, we can draw three broad conclusions about firms’ payout policies. First, firms exhibit a strong desire to maintain modest, steady growth in dividends that is roughly consistent with the long-run growth in earnings. Second, share repurchases have accounted for a growing fraction of total cash payouts over time. Third, when earnings fluctuate, firms adjust their short-term payouts primarily by adjusting share repurchases (rather than dividends), cutting buybacks during recessions, and increasing them rapidly during economic expansions.Matter of factShare Repurchases Gain Worldwide PopularityThe growing importance of share repurchases in corporate payout policy is not confined to the United States. In most of the world’s largest economies, repurchases have been on the rise in recent years, eclipsing dividend payments at least some of the time in countries as diverse as Belgium, Denmark, Finland, Hungary, Ireland, Japan, Netherlands, South Korea, and Switzerland. A study of payout policy at firms from 25 different countries found that share repurchases rose at an annual rate of 19 percent from 1999 through 2008.REVIEW QUESTIONS14–1What are the two ways that firms can distribute cash to shareholders?14–2Why do rapidly growing firms generally pay no dividends?14–3The dividend payout ratio equals dividends paid divided by earnings.How would you expect this ratio to behave during a recession? What about during an economic boom?14.2 The Mechanics of Payout PolicyLG 1At quarterly or semiannual meetings, a firm’s board of directors decides whether and in what amount to pay cash dividends. If the firm has already established a precedent of paying dividends, the decision facing the board is usually whether to maintain or increase the dividend, and that decision is based primarily on the firm’s recent performance and its ability to generate cash flow in the future. Boards rarely cut dividends unless they believe that the firm’s ability to generate cash is in serious jeopardy. Figure 14.3 plots the number of U.S. public industrial firms that increased, decreased, or maintained their dividend payment in each year from 1981 through 2011. Clearly, the number of firms increasing their dividends is far greater than the number of companies cutting dividends in most years. When the economy is strong, as it was from 2003 to 2006, the ratio of industrial firms increasing dividends to those cutting dividends may be 10 to 1 or higher. However, a sign of the severity of the most recent recession was that in 2009 this ratio was just 1.5 to 1. That year, 401 U.S. public industrial firms increased their dividend, whereas 266 firms cut dividends.FIGURE 14.3 U.S. Public Industrial Firms Increasing, Decreasing, or Maintaining DividendsNumber of U.S. public industrial firms that increased, decreased, or maintained their dividend payment in each year from 1981 through 2011Figure 14.3 clearly shows that firms prefer to increase rather than decrease dividends, but what is most evident is that firms prefer to maintain their established dividend levels. In the average year, 79 percent of U.S. industrial firms elect to maintain their previous year’s dividend payout, and 96 percent avoid decreasing their dividend. Although some firms will choose to grow their dividend payout, the main goal of nearly all firms is to do whatever is necessary to avoid cutting dividends.CASH DIVIDEND PAYMENT PROCEDURESWhen a firm’s directors declare a dividend, they issue a statement indicating the dividend amount and setting three important dates: the date of record, the ex-dividend date, and the payment date. All persons whose names are recorded as stockholders on the date of record receive the dividend. These stockholders are often referred to as holders of record.date of record (dividends)Set by the firm’s directors, the date on which all persons whose names are recorded as stockholders receive a declared dividend at a specified future time.Because of the time needed to make bookkeeping entries when a stock is traded, the stock begins selling ex dividend 2 business days prior to the date of record. Purchasers of a stock selling ex dividend do not receive the current dividend. A simple way to determine the first day on which the stock sells ex dividend is to subtract 2 business days from the date of record.ex dividendA period beginning 2 business days prior to the date of record, during which a stock is sold without the right to receive the current dividend.The payment date is the actual date on which the firm mails the dividend payment to the holders of record. It is generally a few weeks after the record date. An example will clarify the various dates and the accounting effects.payment dateSet by the firm’s directors, the actual date on which the firm mails the dividend payment to the holders of record.Example 14.1On August 21, 2013, the board of directors of Best Buy announced that the firm’s next quarterly cash dividend would be $0.17 per share, payable on October 1, 2013, to shareholders of record on Tuesday, September 10, 2013. Best Buy shares would begin trading ex dividend on the previous Friday, September 6. At the time of the announcement, Best Buy had 340,967,179 shares of common stock outstanding, so the total dividend payment would be $57,964,420. Figure 14.4 shows a time line depicting the key dates relative to the Best Buy dividend. Before the dividend was declared, the key accounts of the firm were as follows (dollar values quoted in thousands):1FIGURE 14.4 Dividend Payment Time LineTime line for the announcement and payment of a cash dividend for Best BuyCash$680,000Dividends payable$ 0Retained earnings3,395,000When the dividend was announced by the directors, almost $58 million of the retained earnings ($0.17 per share × 341 million shares) was transferred to the dividends payable account. The key accounts thus becameCash$680,000Dividends payable$ 57,964Retained earnings3,337,036When Best Buy actually paid the dividend on October 26, this produced the following balances in the key accounts of the firm:Cash$622,036Dividends payable$ 0Retained earnings3,337,036The net effect of declaring and paying the dividend was to reduce the firm’s total assets (and stockholders’ equity) by almost $58 million.SHARE REPURCHASE PROCEDURES1. The accounting transactions described here reflect only the effects of the dividend. Best Buy’s actual financial statements during this period obviously reflect many other transactions.The mechanics of cash dividend payments are virtually the same for every dividend paid by every public company. With share repurchases, firms can use at least two different methods to get cash into the hands of shareholders. The most common method of executing a share repurchase program is called an open-market share repurchase. In an open-market share repurchase, as the name suggests, firms simply buy back some of their outstanding shares on the open market. Firms have a great deal of latitude regarding when and how they execute these open-market purchases. Some firms make purchases in fixed amounts at regular intervals, whereas other firms try to behave more opportunistically, buying back more shares when they think that the share price is relatively low and fewer shares when they think that the price is high.open-market share repurchaseA share repurchase program in which firms simply buy back some of their outstanding shares on the open market.In contrast, firms sometimes repurchase shares through a self-tender offer or simply a tender offer. In a tender offer share repurchase, a firm announces the price it is willing to pay to buy back shares and the quantity of shares it wishes to repurchase. The tender offer price is usually set at a significant premium above the current market price. Shareholders who want to participate let the firm know how many shares they would like to sell back to the firm at the stated price. If shareholders do not offer to sell back as many shares as the firm wants to repurchase, the firm may either cancel or extend the offer. If the offer is oversubscribed, meaning that shareholders want to sell more shares than the firms wants to repurchase, the firm typically repurchases shares on a pro rata basis. For example, if the firm wants to buy back 10 million shares, but 20 million shares are tendered by investors, the firm would repurchase exactly half of the shares tendered by each shareholder.tender offer share repurchaseA repurchase program in which a firm offers to repurchase a fixed number of shares, usually at a premium relative to the market value, and shareholders decide whether or not they want to sell back their shares at that price.A third method of buying back shares is called a Dutch auction share repurchase. In a Dutch auction, the firm specifies a range of prices at which it is willing to repurchase shares and the quantity of shares that it desires. Investors can tender their shares to the firm at any price in the specified range, which allows the firm to trace out a demand curve for their stock. That is, the demand curve specifies how many shares investors will sell back to the firm at each price in the offer range. This analysis allows the firm to determine the minimum price required to repurchase the desired quantity of shares, and every shareholder receives that price.Dutch auction share repurchaseA repurchase method in which the firm specifies how many shares it wants to buy back and a range of prices at which it is willing to repurchase shares. Investors specify how many shares they will sell at each price in the range, and the firm determines the minimum price required to repurchase its target number of shares. All investors who tender receive the same price.Example 14.2In July 2013, Fidelity National Information Services announced a Dutch auction repurchase for 86 million common shares at prices ranging from $29 to $31.50 per share. Fidelity shareholders were instructed to contact the company to indicate how many shares they would be willing to sell at different prices in this range. Suppose that after accumulating this information from investors, Fidelity constructed the following demand schedule:Offer priceShares tenderedCumulative total$295,000,0005,000,00029.2510,000,00015,000,00029.5015,000,00030,000,00029.7518,000,00048,000,0003018,500,00066,500,00031.2519,500,00086,000,00031.5020,000,000106,000,000At a price of $31.25, shareholders are willing to tender a total of 86 million shares, exactly the amount that Fidelity wants to repurchase. Each shareholder who expressed a willingness to tender their shares at a price of $31.25 or less receives $31.25, and Fidelity repurchases all 86 million shares at a cost of roughly $2.7 billion.TAX TREATMENT OF DIVIDENDS AND REPURCHASESFor many years, dividends and share repurchases had very different tax consequences. The dividends that investors received were generally taxed at ordinary income tax rates. Therefore, if a firm paid $10 million in dividends, that payout would trigger significant tax liabilities for the firm’s shareholders (at least those subject to personal income taxes). On the other hand, when firms repurchased shares, the taxes triggered by that type of payout were generally much lower. There were several reasons for this difference. Only those shareholders who sold their shares as part of the repurchase program had any immediate tax liability. Shareholders who did not participate did not owe any taxes. Furthermore, some shareholders who did participate in the repurchase program might not owe any taxes on the funds they received if they were tax-exempt institutions or if they sold their shares at a loss. Finally, even those shareholders who participated in the repurchase program and sold their shares for a profit paid taxes only at the (usually lower) capital gains tax rate, (assuming the shares were held for at least one year), and even that tax only applied to the gain, not to the entire value of the shares repurchased. Consequently, investors could generally expect to pay far less in taxes on money that a firm distributed through a share repurchase compared to money paid out as dividends. That differential tax treatment in part explains the growing popularity of share repurchase programs in the 1980s and 1990s.The Jobs and Growth Tax Relief Reconciliation Act of 2003 significantly changed the tax treatment of corporate dividends for most taxpayers. Prior to passage of the 2003 law, dividends received by investors were taxed as ordinary income at rates as high as 35 percent. The 2003 act reduced the tax rate on corporate dividends for most taxpayers to the tax rate applicable to capital gains, which is a maximum rate of 5 percent to 15 percent, depending on the taxpayer’s tax bracket. This change significantly diminishes the degree of “double taxation” of dividends, which results when the corporation is first taxed on its income and then shareholders pay taxes on the dividends that they receive. After-tax cash flow to dividend recipients is much greater at the lower applicable tax rate; the result is noticeably higher dividend payouts by corporations today than prior to passage of the 2003 legislation.In early 2012, Congress passed the American Taxpayer Relief Act of 2012. For eveyone except those individuals in the newly established highest tax bracket, dividends and capital gains continue to be taxed at 15 percent. (For more details on the impact of the 2012 act, see the Focus on Practice box.)Personal Finance Example 14.3My Finance Lab Solution VideoThe board of directors of Espinoza Industries, Inc., on October 4 of the current year, declared a quarterly dividend of $0.46 per share payable to all holders of record on Friday, October 30, with a payment date of November 19. Rob and Kate Heckman, who purchased 500 shares of Espinoza’s common stock on Thursday, October 15, wish to determine whether they will receive the recently declared dividend and, if so, when and how much they would net after taxes from the dividend given that the dividends would be subject to a 15% federal income tax.in practice focus on PRACTICE: Capital Gains and Dividend Tax Treatment Extended to 2012 and Beyond for SomeIn 1980, the percentage of firms paying monthly, quarterly, semiannual, or annual dividends stood at 60 percent. By the end of 2002, this number had declined to 20 percent. In May 2003, President George W. Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act of 2003(JGTRRA). Prior to that new law, dividends were taxed once as part of corporate earnings and again as the personal income of the investor, in both cases with a potential top rate of 35 percent. The result was an effective tax rate of 57.75 percent on some dividends. Although the 2003 tax law did not completely eliminate the double taxation of dividends, it reduced the maximum possible effect of the double taxation of dividends to 44.75 percent. For taxpayers in the lower tax brackets, the combined effect was a maximum of 38.25 percent. Both the number of companies paying dividends and the amount of dividends spiked following the lowering of tax rates on dividends. For example, total dividends paid rose almost 14 percent in the first quarter after the new tax law was enacted, and the percentage of firms initiating dividends rose by nearly 40 percent the same quarter.The tax rates under JGTRRA were originally programmed to expire at the end of 2008. However, in May 2006, Congress passed the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), extending the beneficial tax rates for 2 more years. Taxpayers in tax brackets above 15 percent paid a 15 percent rate on dividends paid before December 31, 2008. For taxpayers with a marginal tax rate of 15 percent or lower, the dividend tax rate was 5 percent until December 31, 2007, and 0 percent from 2008 to 2010. Long-term capital gains tax rates were reduced to the same rates as the new dividend tax rates through 2010. Although JGTRRA expired at the end of 2010, Congress extended the law until 2012 by passing the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.At the onset of 2012, the pre-JGTRRA taxation of dividends would reappear unless further legislation made the law permanent. Those arguing to make the JGTRRA permanent pointed toward the weak economy and suggested that taxes needed to remain low to stimulate business investment and job creation. Others noted that the U.S. budget deficit was at an all-time high, so some combination of higher taxes and reduced spending was necessary to avoid economic problems associated with too much debt.In early 2012, Congress passed the American Taxpayer Relief Act of 2012. For individuals in the 25 percent, 28 percent, 33 percent, and 35 percent income tax brackets, qualified dividends as well as capital gains continue to be taxed at 15 percent. However, for individuals with more than $400,000 in taxable income—and couples with more than $450,000—the rate increased to 20 percent. As was the case under JGTRRA, people in the 10 percent and 15 percent brackets, as before, will have a zero tax rate on dividends and capital gains.How might the expected future reappearance of higher tax rates on individuals receiving dividends affect corporate dividend payout policies?Given the Friday, October 30, date of record, the stock would begin selling ex divi
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