Effect of Corporate Tax Cut on the Market
As the year 2001 unfolds and the presidency of George W. Bush begins to preside over the country, income tax rates have become a concern. President Bush is pushing for a new income tax bill that will reduce the tax brackets from 15%, 28%, 31%, 36%, and 39.6% to a new bracket in 2006 of 10%, 15%, 25%, and 33%. A cut in individual income taxes would benefit most Americans and is well deserved. However, there is no plan to cut the corporate tax rates as of yet. Such a decline to the corporate tax rates could spawn a number of possibilities for firms and even influence the market. However, will a decline in the corporate tax rate positively influence market volume and different firms' financial activities (i.e. investing, repurchasing, options)? A question of this nature can be answered through analysis of two companies' benefits or detriments due to the reduction. There is a basic relationship between the market volume and corporate tax rates. A decrease in the corporate rates would allow companies to pay less on their earnings, leaving them with more Net Income (NI). With this increase in net income, a company can afford to invest in other areas or allows them to repurchase their stock. By repurchasing stock, the
The next decision a firm must make is how to finance the company. The reasoning? Simple: if the price of the share goes down, then there is a possibility that when the time came for an upswing, investors wouldn't be paying the higher price as they were before the news hit Wall Street. There are two possible options that they can take: debt or equity. If the company has excess cash on hand they may, at their discretion, buy back shares on the open market or by way of a tender offer (offering to buy back shares from shareholders at a certain price). A simple example can be done giving the! following information: The EPS for this particular stock has dropped $6. By converting stocks and bonds to common shares, the shareholders are diluting their own earnings. Debt financing is considered a lower risk security that is based on a fixed contract. These two companies are different in nature: Merck Pharmaceuticals relies on a "first-mover" principle, while Ford Motor Co. Along with market performance, a firm may need to adapt its financial activities as well. Plus, the amount of taxable income decreases with the p!ayment of dividends. The reason that equity financing is so disliked among CFOs is because there is not definiteness on the future value of this capital raising method. In buying shares, the overall status of the market will rise due to the price increases that occur. "One of the chief reasons corporations choose stock buybacks over cash payouts to reward investors is taxes" (Lazo, WSJ 3/12/01).
Common topics in this essay:
Wall Street,
Share EPS,
Income NI,
Dow Jones,
President Bush,
Pecking Theory,
Structure Theory,
Anderson Caldwell,
CFO Debt,
Inc INAI,
tax rate,
equity financing,
corporate tax,
capital structure,
tax rates,
corporate tax rate,
debt equity,
corporate tax rates,
repurchase stock,
net income,
market volume,
capital-gains rate,
decline corporate tax,
capital-gains rate ordinary,
debt equity financing,
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