Which of the following statements is least accurate with respect to the various theories that exist ...

By Investopedia Staff AAA
Q:

Which of the following statements is least accurate with respect to the various theories that exist about dividend policies?
a) The clientele effect asserts that a change in dividend policy would simply substitute one set of investors with another, and thus leaving the stock price largely unchanged.
b) The tax preference theory argues that interest is tax deductible and thus the lower the proportion of equity and thus dividends, the greater will be each share value.
c) The bird in the hand theory argues that dividends are the more certain component of total return, and hence, the higher this component, the more valuable the share will be.
d) The dividend irrelevance theory argues that dividends are simply how the firm's cash flows are distributed and thus should have no impact on stock price.

A:

The correct answer is: b)
The tax preference theory simply argues that capital gain return results in a higher after tax return than would dividends. Thus, firms that reinvest earnings as opposed to paying them out as dividends, would be valued more.

2005 LOS: 11.1.G.a - 11.1.G.g


RELATED FAQS

  1. An individual has started investments of $100/month into a spread-load ...

    The correct answer is b. When a periodic payment (or contractural) plan company is organized as a spread-load company, it ...
  2. Based on the Employment Retirement Income Security Act (ERISA), a retirement plan ...

    The correct answer is b. With regard to eligibility, the plan must cover all employees 21 and older who have worked for the ...
  3. The Chairman of Bright Star Life and Casual had a meeting with his broker this afternoon ...

    The correct answer is b) Insider trading would include information that is material and non-public. Certainly, a poor earnings ...
  4. Which statements about common shareholder rights are FALSE? I. A shareholder may ...

    The correct answer is a. I should be the the other way around: convertible bond holders can exchange their bonds for shares. ...
RELATED TERMS
  1. No results found.

You May Also Like

Related Articles
  1. No results found.
Trading Center