Which of the Following Statements Is CORRECT

question 28

Multiple Choice

Which of the following statements is CORRECT?

• A) If a firm follows the residual dividend model,then a sudden increase in the number of profitable projects would be likely to lead to a reduction of the firm's dividend payout ratio.
• B) The clientele effect explains why so many firms change their dividend policies so often.
• C) One advantage of adopting the residual dividend model is that this policy makes it easier for a corporation to attract a specific and well-identified dividend clientele.
• D) New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don't change the firm's total amount of book equity.
• E) Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received.

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Definitions:

Marginal Cost

The increase in cost resulting from the production of one additional unit of a good or service.

Perfectly Elastic

Describes a market situation where the quantity demanded or supplied changes infinitely with even a slight change in price, indicating extreme sensitivity.

Price-taker Industry

A Price-taker Industry is one in which individual firms have no control over the price of their product and must accept the market price as determined by supply and demand.

Constant Cost Industry

An industry wherein the costs of production do not change as the overall level of output increases or decreases.