Consider Two Very Different Firms, M and N

question 29

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:

Emotional Stability-Instability

A personality trait spectrum where an individual's ability to remain stable and balanced versus experiencing frequent mood swings is measured.

Archetypes

Universal, symbolic images that appear across cultures and literature, representing fundamental human desires and emotions.

Libido

A term used in psychoanalytic theory to denote the energy of the sexual drive as a component of the life instinct.

Collective Unconscious

A concept in psychology that refers to the part of the unconscious mind which is derived from ancestral memory and experience and is common to all humankind.