Firm M Is a Mature Company in a Mature Industry

question 14

Multiple Choice

Firm M is a mature company in a mature industry.Its annual net income and cash flows are 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 company 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 lower target debt ratio than Firm N.
• B) Firm M probably has a higher target dividend payout ratio than Firm N.
• C) If the corporate tax rate increases,the debt ratio of both firms is likely to decline.
• D) The two firms are equally likely to pay high dividends.
• E) Firm N is likely to have a clientele of shareholders who want a consistent,stable dividend income.

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Definitions:

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The systematic application of scientific methods to assess the implementation, processes, and outcomes of programs, aimed at measuring their effectiveness and impact.

Financial Accountability

The responsibility of individuals or organizations to manage funds in an efficient, transparent, and lawful manner, often requiring regular reporting and audit.

Problem of Reactance

A psychological phenomenon where individuals exhibit resistance or opposition to external pressures or attempts at persuasion, often resulting in a desire to restore threatened freedoms.

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Activities undertaken for enjoyment, leisure, and relaxation, which can vary widely and include sports, crafts, and games.