Which of the Following Statements Is CORRECT

question 42

Multiple Choice

Which of the following statements is CORRECT?

• A)One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
• B)If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy.
• C)If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve.
• D)If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios.
• E)Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.

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Definitions:

Investor Returns

The gain or loss on an investment over a specified period, usually expressed as a percentage of the investment's initial cost.

Capital Components

The various sources of funding a company uses to finance its operations, including debt, equity, and any hybrid instruments.

Cost of Capital

The essential return needed to justify the investment in a capital budgeting project, like constructing a new manufacturing facility.

Market Value

Today's market rate for the purchase or sale of services or assets.