If the MM Hypothesis About Dividends Is Correct, and If

question 54

Multiple Choice

If the MM hypothesis about dividends is correct, and if one found a group of companies that differed only with respect to dividend policy, which of the following statements would be most correct?

• A) The residual distribution model should not be used, because it is inconsistent with the MM dividend hypothesis.
• B) The total expected return, which in equilibrium is also equal to the required return, would be higher for those companies with lower payout ratios because of the greater risk associated with capital gains versus dividends.
• C) If the expected total return of each of the sample companies were divided into a dividend yield and a growth rate, and then a scatter diagram (or regression) analysis were undertaken, then the slope of the regression line (or b in the equation D1/P0 = a + b(g)) would be equal to +1.0.
• D) None of the statements above is true.
• E) All of the statements above are true.

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Definitions:

Net Operating Cash Flow

The amount of cash generated by a company's business operations, after covering operating expenses but before investment and financing activities.

Sensitivity Analysis

A technique used to determine how different values of an independent variable affect a particular dependent variable under a given set of assumptions.

Market Risk

The risk of financial loss due to factors that affect the entire market or economy, such as changes in interest rates, inflation, and recessions.

Simulation Analysis

Simulation analysis involves using a model to estimate how uncertain variables in a financial or project plan might affect outcomes, helping in assessing risk and making decisions.