Which of the Following Statements Is Correct

question 7

Multiple Choice

Which of the following statements is correct?

• A) If the dividend irrelevance theory (which is associated with the names Modigliani and Miller)were exactly correct,and if this theory could be tested with "clean" data,then we would find,in a regression of dividend yield and capital gains,a line with a slope of −1.0.
• B) The tax preference and bird-in-the-hand theories lead to identical conclusions as to the optimal dividend policy.
• C) If a company raises its dividend by an unexpectedly large amount,the announcement of this new and higher dividend is generally accompanied by an increase in the stock price.This is consistent with the bird-in-the-hand theory,and Modigliani and Miller used these findings to support their position on dividend theory.
• D) If it could be demonstrated that a clientele effect exists,this would suggest that firms could alter their dividend payment policies from year to year to take advantage of investment opportunities without having to worry about the effects of changing dividends on capital costs.
• E) Each of the above statements is false.

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Definitions:

Equilibrium GDP

Equilibrium GDP, or Gross Domestic Product, is the level of output where aggregate demand equals aggregate supply, resulting in no unintended changes in inventories.

Inflationary Gap

This term reflects the difference between the actual output of an economy and the maximum potential output it could achieve with full employment, often indicating inflation pressures.

Equilibrium GDP

The level of Gross Domestic Product at which the total quantity of goods and services produced equals the total quantity of goods and services purchased.

Deflationary Gap

A condition in which aggregate demand is lower than the aggregate supply potentially leading to deflation.