Consider Two Very Different Firms, M and N

question 42

Multiple Choice

Consider two very different firms, M and N.Firm M is a mature firm in a mature industry.Its annual net income and net cash flows are both consistently high and stable.However, M's growth prospects are quite limited, so its capital budget is small relative to its net income.Firm N is a relatively new firm in a new and growing industry.Its markets and products have not stabilized, so its annual operating income fluctuates considerably.However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future.Which of the following statements is correct?

• A) Firm M probably has a higher dividend payout ratio than Firm N.
• B) If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
• C) The two firms are equally likely to pay high dividends.
• D) Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income.
• E) Firm M probably has a lower debt ratio than Firm N.

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Definitions:

Pelvic Girdle

Portion of the vertebrate skeleton to which the lower (hind) limbs are attached; consists of the coxal bones.

Coxal

Pertaining to the hip or hip joint, often used in the context of bone anatomy to describe the region or aspects of the pelvis.

Fontanel

Soft spots on an infant's skull where the bones have not yet fused, allowing for growth of the brain and skull.

Diaphysis

The shaft or central part of a long bone, which is typically cylindrical in shape and provides leverage and major weight support.