 The tax preference of an investor for a share repurchase then cash dividend depends upon tax on dividend and tax on capital gains. These two types of taxes vary by income, jurisdictions, investment horizons and investment domains like investment in the shares of non-profit oriented firms. So the firms try to attract different groups of investors depending upon their dividend policy. We must determine a combined effect of tax rate on dividend and tax rate on capital gains and quantify this effect in order to determine an effective dividend tax rate for an investor in the market. Now assume there is an investor who buys an ex-dividend stock today and qualifies herself for the dividend which is denoted here by DIV or DIV. At tax rate on dividend the after tax cash flows of this particular investor will be equal to DIV into Y and minus tax on dividend. This means that if the price when the share is come dividend is greater than the price when the share is ex-dividend the investor will be expecting to incur a capital loss on her trade of the shares the investors hold. This means that with the tax rate on capital gain the after tax loss of this particular investor will be equal to the excess of price when the share is trading at come dividend over the price when the share is trading at ex-dividend. This differential multiplied by Y minus tax on capital gain and if this amount exceeds the after tax cash flows of dividend the investor will gain by selling the stock just before it goes the ex-dividend and the investor is then buying it afterwards. This means that the investors in fact trying to have some cash dividend that the firm is offering to the investors. This means that an arbitrary opportunity is existing unless the price drops and the dividends are equal after taxes and if in terms of share prices if there is any dropage then this means that the firm share is trading at a lower price but there is a gain on the tax on the dividend at that TD. But the shareholders is though not getting any capital gain yet the shareholders is in fact getting a tax credit on his loss at the tax rate of capital gain. This means that there is an effective tax rate in this particular scenario and that effective tax rate which is denoted by T steric into D. This measures the additional tax on each unit of after tax capital gain that is received by the shareholders as dividend. Now we have an example let's see that in year 2002 the tax rate on dividend is 39% and tax rate on capital gain is 20% and year 2003 these rates are 15% and 15% respectively. The question is that effective tax rate dividend tax rate that is T steric D but it would be for year 2002 and 2003 for any investor and if we put these figures into the model that is used to determine the effective tax rate on dividend for 2002 this is 23.75% and this rate indicates a significant tax disadvantage for the shareholder for its dividend because for each dollar of dividend it will worth only 0.76 in capital gain received by that particular shareholder and for 2003 the effective tax rate on dividend is 0%. This means that there is a cut in 2003 and that tax cut has eliminated the tax disadvantage of dividends for one year investor. Tax rates differ across the investors. This means that the effective tax rate of dividend for an investor depends on tax rates for its dividends and the capital gains he receives from market. This means that there are certain other factors that due to these factors the tax rates differ like there is a factor that is income level. Investors with different level of incomes fall into different tax categories and for investment horizons dividends and capital gains on stock held for single or multiple periods are taxed at different tax rates but and also there is certain differences among the tax jurisdictions different tax rates for domestic investors in different regions in the same country and the same is true for different tax rates for domestic investors and the foreign investors then there is also a factor in terms of investor types investment accounts like stocks held by individuals in a retirement account on stock held through some pension funds may not be taxed whereas the stocks for stocks from other profitable organizations or profit oriented organizations will attract certain rate of taxes. Cliential effect is a phenomenon that states that there is a difference in tax preferences across the investors groups. This means that individuals in the highest tax brackets have a preference for stocks that pay no or low dividends whereas tax free investors and firms may have a preference for stocks that pay higher taxes. A higher dividend this means a firm needs to optimize its dividend policy as per the tax preference of the different investors who hold the shares of this particular firm. Dividend capture theory states that keeping transactions cost absent investors can trade shares at a time of dividends. This means that in this way non-taxed investors can have the chance to earn dividend. Now the implication of this approach is that the larger volume of trade in the stock around the X dividend day will be there because the high tax investors will be selling their stock and the low tax investors will be buying these types of stocks in anticipation of having higher amount of dividend in the future but when the X dividend date is passing on this trade is getting reversed by the original shareholders.