Proponents of the Dividend Irrelevance Theory Argue That, All Else

question 117

Multiple Choice

Proponents of the dividend irrelevance theory argue that, all else being equal, an investor's required return and the value of the firm are unaffected by dividend policy, for all of the following reasons, EXCEPT

• A) the firm's value is determined solely by the earning power and risk of its assets.
• B) investor's are generally risk averse and attach less risk to current as opposed to future dividends or capital gains.
• C) if dividends do affect value, they do so solely because of their information content, which signals managements' earnings expectations.
• D) a clientele effect exists which causes a firm's shareholders to receive the dividends that they expect.

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Definitions:

Classical Dichotomy

The theoretical separation of nominal and real variables

Short-Run Phillips

A theoretical framework that implies a short-term inverse correlation between inflation rates and unemployment levels.

Classical Dichotomy

The theoretical separation of nominal and real variables in an economy, suggesting that changes in the money supply only affect nominal variables and not real variables like output.

Fiscal Policy

Modifications by the government in its expenditure and tax policies to impact the country's economic conditions.