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:

Expansionary Gap

A situation where the actual economic output exceeds the potential output significantly, often leading to inflation.

Cyclically Balanced

A term that might not be widely recognized in standard economic literature; if intended to mean maintaining balance over economic cycles, it could refer to the aim of achieving economic stability across different phases of economic cycles.

Automatic Stabilizers

Economic policies and programs designed to offset fluctuations in a nation's economic activity without intervention by the government or policymakers.

Falling Output

Falling output describes a situation where an economy or a particular sector is producing less goods or services over time.