Which of the Following Statements Is CORRECT

question 40

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 its 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.

---

Definitions:

Income Tax Expense

Income tax expense is the amount of money a company is required to pay in taxes based on its taxable income for a given period.

Deferred Tax Expense

A financial reporting concept referring to the difference in taxes payable in the future due to temporary differences between the tax and book accounting.

Deferred Tax Liability

A tax obligation that a company owes but can delay paying to a future period, often arising from differences in accounting methods for book and tax purposes.

Internal Revenue Code

The comprehensive set of tax laws and regulations established by the United States federal government.