The Primary Purpose of Laws Prohibiting a Firm from Paying

question 63

Multiple Choice

The primary purpose of laws prohibiting a firm from paying dividends that include its legal capital is to:

• A) reduce investors' tax liability.
• B) ensure that the balance sheet balances.
• C) prevent managers from paying out all the firm's assets.
• D)prevent managers from paying large dividends.

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Definitions:

Discount Rate

The discount rate is the interest rate used to calculate the present value of future cash flows in discounted cash flow analysis, reflecting the risk and opportunity cost of capital.

Pretax Return

The income an investor or business earns before any taxes are deducted.

Net Present Value

A financial measurement that calculates the value of a project or investment by discounting the expected future cash flows to their present value using a specific discount rate.

Tractor-Trailer

A vehicle configuration consisting of a front tractor unit coupled to a trailer carrying cargo.