Which of the Following Statements Is Correct

question 24

Multiple Choice

Which of the following statements is correct?

• A) If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase.
• B) The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
• C) Companies may pay too high a price in a large open market repurchase if it takes too long to complete.
• D) An investor's capital gains from selling stock in a repurchase are always taxed at a higher rate than if the distribution were dividends.
• E) The tax code encourages companies to pay dividends rather than reinvest earnings.

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Definitions:

Earnings Capitalization

A method for valuing a company by dividing its annual earnings by a certain capitalization rate, reflecting the investment's expected rate of return.

Value-Irrelevant

pertains to information or aspects that do not affect an entity's market value or decision-making process.

Restructured Earnings

Earnings that have been adjusted to reflect the impact of significant changes or reorganizations within a company, often excluding non-recurring items to better represent ongoing profitability.

Abnormal Earnings

Profits that exceed or fall short of the average expected earnings by a company over a specific period, often highlighting unusual events or circumstances.