Why May a Large Increase in Earnings Not Translate into a Large

question 8

Multiple Choice

Why may a large increase in earnings not translate into a large increase in dividends?

• A) The earnings will be taxed.
• B) Some investors may prefer capital gains.
• C) Managers wish to assess the earning's persistence.
• D) The earnings may already be a part of retained earnings.

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Definitions:

Trade Settled

The completion of a securities transaction when the seller delivers the security to the buyer and receives payment in return.

Purchasing Power Parity

An economic theory that compares different countries' currencies through a "basket of goods" approach, to assess relative currency value.

Forward Rate

The forward rate is the agreed-upon interest rate for a financial transaction that will occur at a future date, often used in the context of foreign exchange and bonds.

Interest Rate Parity

An economic theory stating that the difference between interest rates in two countries is equal to the expected change in exchange rates between their currencies.