If the Modigliani and Miller Hypothesis About Dividends Is Correct,and

question 37

Multiple Choice

If the Modigliani and Miller hypothesis about dividends is correct,and if one found a group of companies which differed only with respect to dividend policy,which of the following statements would be most correct?

• A) The residual dividend model should not be used, because it is inconsistent with the MM dividend hypothesis.
• B) The total expected return, which in equilibrium is also equal to the required return, would be higher for those companies with lower payout ratios because of the greater risk associated with capital gains versus dividends.
• C) If the expected total return of each of the sample companies were divided into a dividend yield and a growth rate, and then a scatter diagram (or regression) analysis were undertaken, then the slope of the regression line (or b in the equation = a + b(g)) would be equal to +1.0.
• D) None of the above statements is true.
• E) All of the above statements are true.

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Definitions:

Seafloor Spreading

The process by which new oceanic crust is formed at mid-ocean ridges and slowly moves away from the ridge.

Subduction-related Magmatism

The process of magma generation and volcanic activity that occurs in zones where one tectonic plate is subducted under another.

Continental Collision

The process by which two continental plates collide, leading to the formation of mountains and other geological features.

Transform Fault

A type of fault where two tectonic plates slide past each other horizontally, commonly found at plate boundaries and associated with significant earthquake activity.