A company is likely to declare higher dividends if..................

Tax rates are relatively lower

The correct answer is option 2- Tax rates are relatively lower.

A company is likely to declare higher dividends if tax rates are relatively lower.

The choice between the payment of dividend and retaining the earnings is, to some extent, affected by the difference in the tax treatment of dividends and capital gains. If tax on dividend is higher, it is better to pay less by way of dividends. As compared to this, higher dividends may be declared if tax rates are relatively lower. Though the dividends are free of tax in the hands of shareholders, a dividend distribution tax is levied on companies. Thus, under the present tax policy, shareholders are likely to prefer higher dividends.