The Manager of XYZ Corp

question 68

Multiple Choice

The manager of XYZ Corp.feels that a dividend increase will increase stock price because many investors value stock with a dividend-discount model.Why might MM disagree with this assertion?

• A)The increased dividend makes the firm much riskier
• B)Future dividend growth may slow due to less retained earnings
• C)Investors prefer capital gains over dividends
• D)Dividend increases will increase the book value but not the market value of the firm

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Definitions:

Coupon Rate

The interest rate that a bond issuer will pay to a bondholder.

Preferred Stock

A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock, typically paying fixed dividends.

Cost of Retained Earnings

The opportunity cost for a company of using its retained earnings as a source of finance for new investments, often estimated using the cost of equity.

Growth Rate

The rate at which a company's sales, earnings, dividends, or assets increase over a specified period.