Assessing the Market Worth of Australian Dividends and Franking Credits

Running head: FINANCE 1
Finance
Name
Institution
Professor
Course
Date

FINANCE 2
Abstract
The franking market value also referred to as theta, is a critical input for estimation of the
weighted average capital cost in Australian monitoring decisions. However, there is lacking
consensus about the appropriate estimation of the franking credits marketing worth. The reason
is that financial imputation effects are always contentious. Mostly the imputation credit effects
on share prices and capital cost are subjected to a lot of debate. The paper will review the
literature in an attempt to attain a consistent approximation of marketing value for dividends and
franking credits.
Introduction
The introducing of an imputation taxation scheme in Australia in 1987 resulted to a
significant transformation in the taxation of country’s dividends. One of the unforeseen
imputation tax structure aspects is building up of franking credit balances at the business level.
The arbitrage theory assumes that in flawless capital markets without transaction charges and
share imputation, the anticipated price reduction of any ex-dividend share could equal the cash
dividend amount. In the dividend imputation, stakeholders obtain a gross profit, comprising of
money dividend plus the franking credit. In this case, the franking credit encompasses the value
of the tax paid for an income at company level. It is clear that in flawless capital markets without
transaction costs, the anticipated dividend daily share value drop-off could be equal to the gross
dividend size. Nevertheless, various studies have observed different market values for the
Australian dividends and franking credits.

FINANCE 3
Literature Review on Assessing the Market Worth of Australian Dividends and
Franking Credits
The market value of Australian dividends and franking credits is not constant, and
different scholars obtain varying costs after conducting their research. Attempts to approximate
the market imputation credits value, which is exploited into share bills, have generated mixed
outcomes. According to (Ainsworth et al. 2015), the benefits range from zero to above 90% of
the imputation credit face worth. Most empirical research has projected the amount, which is
ascribed to imputation credit with references to precise dividend actions like the dividend drop or
using relative pricing. In contrast to what is indicated by most researches, the 2015 Tax Treasury
Papers took a risky position suggesting that imputation credits have no value, which is exploited
in share values. The reason, as it is indicated by (Treasury 2015) is that capital cost in Australia
is set by the global markets. The suggestion by the (Treasury 2015) reiterated earlier arguments
initiated by Cannavan et al. 2014. The authors also concluded imputation credits does not have
value which is capitalized in share prizes.
From reviewing the literature of imputation credit conducted by Ainsworth et al. (2015),
the authors suggested that imputation credit face value is around 38%. According to Aainsworth
et al. (2015), estimation of the imputation credit value is essential in valuing firms and capital
cost as well as understanding the impact on the company behaviors. Current research done by
McClure et al. (2016) shows dividend imputation has decreased tax aggressiveness for
companies with strong adverse connection between paying franked dividends and levy
fierceness. An assessment of tax aggressiveness level among companies paying franked
dividends and those reimbursing unfranked dividends is astonishing. The firms which paid
franked dividends remunerated almost 13.3% extra tax on similar level incomes. Besides,