Which of the Following Statements Is Correct

question 2

Multiple Choice

Which of the following statements is correct?

• A) If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy.
• B) If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve.
• C) If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios.
• D) Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.
• E) One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.

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Definitions:

Accounts Payable Balance

The total amount of money a company owes to its suppliers or creditors for goods and services purchased on credit.

Unearned Revenue

Income received by a business for goods or services yet to be delivered or provided; also known as deferred revenue.

Prepaid Expense

Payments made beforehand for products or services that will be provided at a later date.

Cash Receipt

A document acknowledging the receipt of cash, often provided to a customer who makes a payment.