Which of the Following Statements Is CORRECT

question 58

Multiple Choice

Which of the following statements is CORRECT?

• A) Suppose a firm that has been earning $2 and paying a dividend of $1.00, or a 50% dividend payout, announces that it is increasing the dividend to $1.50. The stock price then jumps from $20 to $30. Some people would argue that this is proof that investors prefer dividends to retained earnings. Miller and Modigliani would agree with this argument.
• B) Other things held constant, the higher a firm's target dividend payout ratio, the higher its expected growth rate should be.
• C) Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings that a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price.
• D) The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to a decrease in dividend payout ratios.
• E) If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a high dividend payout ratio.
• Multiple Choice: Problems
• These problems can be changed algorithmically, and the computer can, at times, produce combinations of variables where the residual policy results in zero dividends and a zero payout ratio. We sometimes constrain the input variables to prevent this from occurring, but we sometimes permit it. When this possibility exists, we so indicate.

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Definitions:

Sales Volume

The total quantity of products or services sold by a company within a specific period.

Units

A measurement for quantity, indicating the individual count or number of items, often used in production, inventory, and sales contexts.

Variable Cost

Costs that vary directly with the level of production or sales volume, such as raw materials and sales commissions.

Units

Basic quantitative measures for product or service output in business operations.