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:

Fixed Costs

Fixed expenses, including rent, salaries, and insurance, that are unaffected by variations in production or sales levels.

Units Produced

A measure of output representing the total number of units of a product made by a company or an industry during a given period.

Costs

The monetary value spent by a company to produce goods or services, including expenses such as materials, labor, and overhead.

Forecasting Risk

The risk associated with the potential inaccuracies in predicting future developments, which can impact planning and decision-making.