It has been argued that it makes no difference whether a firm pays dividends or retains the earnings, since the value to the stockholders is the same for both.

For example, assuming a 0.4 tax rate and an ability to find a stock that is growing at a before-tax rate of 0.10, if $100 is paid as a dividend, the investor will have after one period

If the funds are retained and invested internally to earn 0.10, and then paid as a dividend after one period, the investor will again have

Comment on the illustration. 

Transcribed Image Text:

$100(0.6) (1.10) = $66.