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:

Strike Price

The specified price at which the holder of an option contract can buy (in case of a call option) or sell (in case of a put option) the underlying security.

Black-Scholes Option Pricing Model

A mathematical formula used to determine the theoretical price of European put and call options, taking into account factors like the stock price, strike price, time to expiration, and volatility.

Strike Price

The set price at which the holder of a financial option has the right to buy (call) or sell (put) the underlying asset.

Market Price

The current price at which an asset or service can be bought or sold in a marketplace.