Myron Gordon and John Lintner Believe That the Required Return

question 7

Multiple Choice

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is lowered.Their argument is based on the assumption that

• A) investors are indifferent between dividends and capital gains.
• B) investors require that the dividend yield plus the capital gains yield equal a constant.
• C) capital gains are taxed at a higher rate than dividends.
• D) investors view dividends as being less risky than potential future capital gains.
• E) investors prefer a dollar of expected capital gains to a dollar of expected dividends because of the lower tax rate on capital gains.

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Definitions:

Perceptual Distortions

Misinterpretations or misunderstandings of sensory input due to biases, prejudices, or errors in judgment.

Framing

The way information is presented or organized to influence people’s perceptions, decisions, and judgments.

Frames

Intellectual structures or perspectives that shape how individuals perceive and understand information or situations.

Disputes

Conflicts or disagreements arising from differing interests, values, or understandings between parties.