Consider Two Very Different Firms, M and NFirm M Is

question 18

Multiple Choice

Consider two very different firms, M and NFirm M is a mature firm in a mature industry Its annual net income and net cash flows are both consistently high and stable However, M's growth prospects are quite limited, so its capital budget is small relative to its net income Firm N is a relatively new firm in a new and growing industryIts markets and products have not stabilized, so its annual operating income fluctuates considerably However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable futureWhich of the following statements is CORRECT?

• A) Firm M probably has a higher dividend payout ratio than Firm N.
• B) If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
• C) The two firms are equally likely to pay high dividends.
• D) Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income.
• E) Firm M probably has a lower debt ratio than Firm N.

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Definitions:

Heroin

An opioid drug made from morphine, a natural substance taken from the seed pod of the various opium poppy plants, known for its addictive properties and illegal status in many countries.

Depressants

A category of drugs that reduce the functioning of the nervous system, often prescribed to relieve anxiety, induce sleep, or manage seizures.

Cocaine

A powerful stimulant drug derived from the leaves of the coca plant, known for its addictive properties and illegal status in many countries.

Tranquilizers

Medications used to reduce tension or anxiety; also known as anxiolytics.