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:

Social Security Contributions

Payments made to a government scheme that provides retirement, disability, and survivals benefits, funded through taxes on employers and employees.

Benefits

Advantages or payments made to employees, members of insurance policies, or other eligible parties, often in the form of health insurance, retirement plans, or disability coverage.

Tax Shelter

An investment strategy or financial arrangement designed to reduce, defer, or eliminate tax liabilities.

Deferred Taxes

Tax liabilities or assets that arise due to differences between the financial accounting and tax treatment of transactions, recognized in corporate financial statements.