Use the Following Information to Answer Questions (5) - (7)

question 51

Multiple Choice

Use the following information to answer questions (5) - (7) . A tire manufacturer has made some
modifications to its most popular tire and wants to see if the tread on the modified tire will last
longer than the original tire. Because there is much variation in the way people drive, the
manufacturer decides to use blocking to reduce this variation. Twenty cars will be used to test the
tires. Ten cars are randomly selected to receive an original tire on the right rear wheel and a
modified tire on the left rear wheel. The remaining ten cars will receive an original tire on the left
rear wheel and a modified tire on the right rear wheel. Each car will then be driven 10,000 miles and
the amount of wear recorded for each wheel.
-Is this a correct use of blocking?

• A)Yes
• B)No

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Definitions:

Target D/E Ratio

The desired debt-to-equity ratio that a company aims to achieve to optimize its capital structure.

Residual Dividend Policy

Residual Dividend Policy is a strategy where a company pays dividends out of the residual or leftover equity only after all project capital needs are met.

Dividend Irrelevance Theory

Holds that dividend policy has no effect on either the price of a firm’s stock or its cost of capital.

Shareholders

Shareholders are individuals or entities that own one or more shares of stock in a public or private corporation, granting them certain rights such as voting on corporate matters and receiving dividends.