Answer (C) is correct . Lower dividend payout ratios will be favored by investors if dividends are taxed at a higher rate than capital gains. The cost of equity for the company will be lower under the lower dividend payout policy because more retained earnings will be available for reinvestment.
Answer (A) is incorrect because A higher dividend payout ratio is associated with a lower stock price when the tax environment favors capital gains over dividends. The reason is that the after-tax return to investors is lower for dividend payments than for capital gains (share price appreciation).
Answer (B) is incorrect because There is no relationship between the book value of equity and the relative taxation of dividends and capital gains.
Answer (D) is incorrect because A lower dividend payout ratio is associated with a higher, not a lower, stock price when the tax environment favors dividends over capital gains.
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