Myron Gordon and John Lintner Believe That the Required Return

question 60

Multiple Choice

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

• A) Investors are indifferent between dividends and capital gains.
• B) Investors require that the dividend yield and 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 value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains.

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Definitions:

Sampling Distribution

The probability distribution of a given statistic based on a random sample, used to estimate the population parameter.

Standard Deviation

A measure of the amount of variation or dispersion of a set of values, indicating how spread out the values are from the mean.

Inspiratory Reserve Volume (IRV)

The additional amount of air that can be inhaled after a normal inhalation, increasing lung volume beyond the tidal volume.

Expiratory Reserve Volume (ERV)

The additional amount of air that can be forcibly exhaled after a normal exhalation.