If the Dividend Relevance Theory Is Valid, Which of the Following

question 18

Multiple Choice

If the dividend relevance theory is valid, which of the following statements must be correct?

• A)Stockholders who prefer to earn capital gains on their investments rather than to receive dividends are not concerned with whether a firm pays dividends because such decisions do not affect the market price of its stock.
• B)Stockholders who prefer to receive annual dividends rather than to earn capital gains on their investments are not concerned with whether a firm invests in acceptable capital budgeting projects because such decisions do not affect the annual income generated by the firm, and thus the dividends that are paid.
• C)If most of the stockholders of a firm prefer to receive current income rather than to earn capital gains on their investments, the firm can reduce its required return on equity by increasing the dividend payout.
• D)Stockholders who prefer to earn capital gains on their investments would like the firm to retain and reinvest any free cash flows that it generates.
• E)A retired individual is more likely to invest in the stock of a company to earn capital gains than to get paid dividends.

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Definitions:

Contingency

A future event or circumstance that is possible but cannot be predicted with certainty; often related to planning in management.

Systems Theory

An interdisciplinary theory that studies complex systems in various fields and seeks to understand their behavior, interrelations, and properties.

Multinational Approach

A strategy used by businesses that operate in multiple countries, adapting operations, products, and marketing strategies to local conditions and cultures.

Universal Process Approach

A theory in management that assumes all organizations, regardless of their specific nature, follow the same fundamental principles.