Which of the Following Is True About the Dividend Relevance

question 29

Multiple Choice

Which of the following is true about the dividend relevance theory?

• A) If investors prefer capital gain on their investment, then the tax effect of dividend receipts does not have any effect on the price of stocks.
• B) If investors prefer current income on their investment, then the tax effect of dividend receipts does not have any effect on the price of stocks.
• C) If investors prefer current income on their investment, the required return on equity should decrease as the dividend payout is increased.
• D) If investors prefer capital gain on their investment, free cash flows to equity should decrease.
• E) If investors prefer both capital gain and current income, the net income of the firm should decrease.

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Definitions:

Teletype Machines

Early communication devices used to send typed messages over long distances through telecommunication lines.

Dividend Yield

A financial ratio that indicates how much a company pays out in dividends each year relative to its share price, often used by investors to gauge the income a company's stock will generate.

Dividend

A portion of a company's earnings that is distributed to shareholders, usually as cash or additional shares, as a reward for their investment in the company's equity.