Page 224 - DCOM508_CORPORATE_TAX_PLANNING

Unit 9: Financial Management Decisions

When a company pays you a cash dividend, it reduces stockholder’s equity for each share Notes
of stock. Stockholder’s equity is calculated by subtracting company liabilities from assets.
Paying dividends reduces cash, which is an asset. Reducing equity represented by each
share of stock can have a negative impact on the stock’s share price. In other words, paying
dividends transfers some of the company’s value directly to shareholders in the form of
cash instead of capital gains. Because dividend taxes are lower than short-term capital
gains taxes, companies can reduce the tax liability for some of their investors by issuing
dividends.
Dividend distribution tax is the tax levied by the Government on companies according
to the dividend paid to a company’s investors. Every domestic company is liable to pay
Dividend Distribution Tax @ 15% on the amount declared, distributed or paid by such
company by way of dividends. The effective rate of tax works out to 16.995%.
A bonus issue or scrip issue is a stock split in which a company issues new shares without
charge in order to bring its issued capital in line with its employed capital. This usually
happens after a company has made profits, thus increasing its employed capital. Therefore,

a bonus issue can be seen as an alternative to dividends. No new funds are raised with a
bonus issue.

The tax benefit provided by issue of bonus shares holds the concern for every company
whose in the process of dividend declaration. Firms opt for issue of bonus shares due to a
number of reasons as stated above however among them the one related to tax benefi t also

hold a significant importance. An issue of bonus shares on capitalisation of profits does not
entail payment of any tax either for the company or its shareholders.
9.6 Keywords

Capital budgeting decision: It is a decision relating planning process an organisation’s long term
investments such as new machinery, replacement machinery, new plants, new products, and
research development projects are worth pursuing.

Capital structure: It refers to the way a corporation finances its assets through some combination
of equity, debt, or hybrid securities.
Dividend decision: It is a decision made by the directors of a company about the amount and
timing of any cash payments made to the company’s stockholders.

Dividend: A share of the after-tax profit of a company, distributed to its shareholders according
to the number and class of shares held by them.
Equity shares: Equity shares means that part of the share capital which is not a preference share
capital. It means all such shares which are not preference shares. Equity shares are also called as
ordinary shares.
Finance decision: The decisions are related to the raising of finance from various resources which

will depend upon decision on type of source, period of financing, cost of financing and the

returns etc.
Finance: It is the study of how money is managed and the actual process of acquiring needed
funds.
Financial management: It implies planning, organising, directing and controlling the fi nancial
activities such as procurement and utilisation of funds of the enterprise.
Interim dividend: A dividend payment made before a company’s AGM and fi nal fi nancial
statements. This declared dividend usually accompanies the company’s interim fi nancial
statements.

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