Which of the Following Are Valid Reasons for a Firm

question 22

Multiple Choice

Which of the following are valid reasons for a firm to reduce or eliminate its cash dividends?
I. The firm is on the verge of violating a bond restriction which requires a current ratio of 1.8 or higher.
II. A firm has just received a patent on a new product for which there is strong market demand and it needs the funds to bring the product to the marketplace.
III. The firm can raise new capital easily at a very low cost.
IV. The tax laws have recently changed such that dividends are taxed at an investor's marginal rate while capital gains are tax exempt.

• A) I and III only
• B) II and IV only
• C) II, III, and IV only
• D) I, II, and IV only
• E) I, II, III, and IV

---

Definitions:

Expected Utility Function

An expected utility function quantifies an individual's preferences under uncertainty, ranking them according to the expected level of satisfaction or utility.

Sure Payment

A guaranteed or fixed payment that is certain to be paid, without any risk or fluctuation.

Probability

A quantification of how probable an event is, with the scale going from 0 to 1.

Lottery

A lottery is a form of gambling which involves drawing lots for a prize, or the allocation of a resource or a chance event resulting in a significant gain to the holder.