Which of the following statements is correct?
A. a. In order to avoid double taxation and to escape the frequently higher tax rate applied to capital gains, stockholders generally prefer to have corporations pay dividends rather than to retain their earnings and reinvest the money in the business. Thus, earnings should be retained only if the firm needs capital very badly and would have difficulty raising it from external sources.
B. b. Under our current tax laws, when investors pay taxes on their dividend income, they are being subjected to a form of double taxation.
C. c. The fact that a percentage of the interest received by one corporation, which is paid by another corporation, is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing.
D. d. If the tax laws stated that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tadeductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.
E. e. Statements b and d are both correct.
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