Proponents of the Dividend Irrelevance Theory Argue That, All Else

question 13

Multiple Choice

Proponents of the dividend irrelevance theory argue that, all else being equal, an investor's required return and the value of the firm are unaffected by dividend policy, for all of the following reasons, EXCEPT

• A) if dividends do affect value, they do so solely because of their informational content, which signals managements' earnings expectations.
• B) a clientele effect exists which causes a firm's shareholders to receive the dividends that they expect.
• C) investor's are generally risk averse and attach less risk to current as opposed to future dividends or capital gains.
• D) the firm's value is determined solely by the earning power and risk of its assets.

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Definitions:

Delusion

A strange false belief firmly held despite evidence to the contrary.

Symptoms

The signs or indications of a condition or disease as observed and experienced by an individual.

Schizophrenia

A chronic and severe mental disorder that affects how a person thinks, feels, and behaves, leading to a range of psychological symptoms.

Diathesis-Stress Model

A psychological theory that explains behavior as a result of potential vulnerability combined with stress from life experiences.