(Comp.) Dividend Concepts C R Answer: D MEDIUM

question 29

Multiple Choice

(Comp.) Dividend concepts C R Answer: d MEDIUM/

• A) Suppose a firm that has been earning $2 and paying a dividend of $1.00, or a 50% payout, announces that it is increasing the dividend to $1.50. The stock price then jumps from $20 to $30. Some people would argue that this is proof that investors prefer dividends to retained earnings. Miller and Modigliani would agree with this argument.
• B) Other things held constant, the higher a firm's target payout ratio, the higher its expected growth rate should be.
• C) Miller and Modigliani's dividend irrelevance theory says that the percentage of its earnings that a firm pays out in dividends has no effect on its cost of capital, but it does affect its stock price.
• D) The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, an increase in the tax rate on dividends relative to that on capital gains would logically lead to a decrease in dividend payout ratios.
• E) If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a high payout ratio.

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Definitions:

State Sales Tax

A tax imposed by a state on sales of goods and services, collected by the seller and passed on to the state government.

Sales Taxes Payable

A liability account that represents the amount of sales tax collected from customers by a business, which is owed to the government.

Adjusting Entry

A journal entry made in the accounting records at the end of an accounting period to allocate income and expenses to the correct periods.

Unearned Revenue

Money received by a company for a service or product that has yet to be delivered or provided.