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:

Bureaucratic

Pertaining to a system of administration characterized by strict policies, procedures, and hierarchy.

Short-run Average Total Cost

The total cost of production (fixed and variable costs combined) divided by the quantity of output produced, calculated when some factors of production are fixed.

Factory

A manufacturing facility where goods are produced or assembled.

Efficient Scale

The level of production at which a company can produce its products at the lowest average cost per unit, maximizing efficiency.