Suppose That the Pre-Tax Holding Period Returns on Two Stocks

question 51

Multiple Choice

Suppose that the pre-tax holding period returns on two stocks are the same.Stock A has a high dividend payout policy and stock B has a low dividend payout policy.If you are an individual in a high marginal tax bracket and do not intend to sell the stocks during the holding period,_________.

• A) stock A will have a higher after-tax holding period return than stock B
• B) the after-tax holding period returns on stocks A and B will be the same
• C) stock B will have a higher after-tax holding period return than stock A
• D) it is impossible to determine which stock will have a higher after-tax holding period return given the information available
• E) none of these

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Definitions:

Uncollectible Accounts

Accounts receivable deemed uncollectible by a business, representing money owed by customers that is unlikely to be paid and usually written off as an expense.

Expense Recognition Principle

An accounting guideline stating that expenses should be recorded in the same period as the revenues they help to generate.

Direct Write-off Method

An accounting method for uncollectible receivables where the specific account's balance is directly removed from accounts receivable.

Allowance Method

A technique in accounting used to adjust accounts receivable for the amount estimated to be uncollectible.