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:

Group Counseling

A therapeutic process where multiple individuals share and explore their issues in a group setting under the guidance of a counselor.

Small Business Owners

Individuals who own and operate a business that is typically smaller in scale compared to larger companies and corporations.

Economy

A system involving the production, distribution, and consumption of goods and services within a society or geographical area.

Government Intervention

Involvement by the government in the market to influence the allocation of resources and distribution of goods.