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From: petersen@ucbvax.ARPA (David A. Petersen)
Newsgroups: net.invest
Subject: Corporate borrowing to finance dividends
Message-ID: <8021@ucbvax.ARPA>
Date: Mon, 10-Jun-85 22:10:21 EDT
Article-I.D.: ucbvax.8021
Posted: Mon Jun 10 22:10:21 1985
Date-Received: Tue, 11-Jun-85 08:25:45 EDT
References: <2425@decwrl.UUCP> <7718@ucbvax.ARPA> <5904@ucla-cs.ARPA>
Reply-To: petersen@ucbvax.UUCP (Paul Bradley)
Organization: University of California at Berkeley
Lines: 14

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 Bradley