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:

Raw Materials Used

The cost of materials that are used in the production process of a company's goods or services.

Total Manufacturing Costs

The sum of all costs directly involved in the production of goods, including raw materials, labor, and overhead expenses.

Manufacturing Overhead

All indirect costs associated with the production process, including but not limited to utilities, maintenance, and factory equipment depreciation.

Hourly Wages

Payment to workers based on the number of hours worked, typically associated with non-salaried employees.