Reality Films,Inc

question 155

Multiple Choice

Reality Films,Inc.is a very profitable company whose stock has appreciated in market value during the past ten years.Even though the firm was established several years ago,it does not pay its stockholders dividends.Reality Films reinvests its earnings.Which of the following statements might best reflect the sentiments of its chief financial officer CFO) ?

• A)There is no purpose in paying dividends to stockholders when it is not required by law.After all,dividends are not tax deductible!
• B)Stockholders receive interest payments twice each year.They do not receive dividends.
• C)Retained earnings are an important source of equity funds for the company.Reinvestment of earnings helps to lower the overall cost of capital.
• D)Retained earnings increase a firm's cost of capital.The higher the cost of capital,the higher the rate of return to investors.

Recognize how the Alternative Minimum Tax (AMT) works and identify tax preference items.

Learn how the material participation tests affect the categorization of income and losses.

Understand the role of nonrecourse and qualified nonrecourse financing in at-risk determinations.

Identify how passive loss rules regulate the deduction of business activity losses.

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Definitions:

Competitors

Other entities that offer similar goods or services within the same market as another entity, competing for the same clientele.

Product Consistency

The assurance that a product or service will be delivered in the same quality and standard across different units, times, or locations.

J.R. Simplot

An American entrepreneur and businessman known for founding the J.R. Simplot Company, a major agricultural supplier specializing in a variety of products, including potatoes for French fries.

Hierarchy

An arrangement or institution where individuals or entities are positioned hierarchically, based on their status or power.