Which of the Following Statements Is CORRECT

question 2

Multiple Choice

Which of the following statements is CORRECT?

• A) Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.
• B) One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
• C) An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM.
• D) If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price.
• E) Stock repurchases make the most sense at times when a company believes its stock is undervalued.

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Definitions:

Spillover Effect

The phenomenon where an emotional reaction to one event spills over and influences the response to another event.

Guilty Knowledge Test

A psychological assessment that measures physiological responses to recognize familiarity with information that should only be known to the guilty party.

Polygraph

A polygraph, commonly known as a lie detector, is an instrument that measures and records several physiological indices such as blood pressure, pulse, respiration, and skin conductivity while the subject is asked a series of questions.

Arousal Hypothesis

A theory suggesting that there is an optimal level of arousal for optimal performance, with too little or too much arousal leading to decreased performance.