What Does the Traditional View of Dividend Policy Say About

question 2

Multiple Choice

What does the traditional view of dividend policy say about a higher payout ratio?

• A) It will depress the share value as shareholders must engage in the cost of searching out new investment opportunities.
• B) It will artificially depress the share value of a company as the growth in dividends will be lower when the absolute amount of dividends is higher.
• C) It will increase the share value of a company as shareholders will be attracted to the investment flexibility provided by liquidity.
• D) It will depress the share value of a company as transactions cost must be subtracted from earnings for those shareholders who wish to retain their investment in the company.
• E) It will increase the share value of a company as the rate of return demanded by investors will drop as the uncertainty of receiving dividends diminishes.

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Definitions:

Real Numbers

A value on the continuous number line which includes all the rational and irrational numbers.

Possible Outcomes

All the potential results that may arise from a specific set of circumstances or an experiment.

Binomial Distribution

A probability distribution that describes the number of successes in a fixed number of independent trials, with each trial having the same probability of success.

Variance

An indicator of how much a dataset varies or is spread out from the average value.