Fin 534 practice quizes

Glenn L. What is the current market price of these bonds? Which of the following statements is most correct? This statement is true.

Fin 534 practice quizes

Answer One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.

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.

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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. 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.

Fin 534 practice quizes

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. Once the percentage is set, then dividend policy is on "automatic pilot" and the actual dividend depends strictly on earnings.

Answer Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios. One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.

An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM.

Fin 534 practice quizes

If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price. Stock repurchases make the most sense at times when a company believes its stock is undervalued.

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