Question of the Week

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.


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

Professionals FAQs
  1. Where can I look for a financial planner?

    References from trusted friends or family members can help you find a financial planner; however, keep in mind that your friends' financial situations and goals may differ from yours and, therefore, their planners won't necessarily be the best fit for you.The Certified Financial Planner (CFP) Board of Standards certifies financial planners and maintains an online list of certified financial planners on its CFP Board of Standards website.
  2. If I am looking to get an Investment Banking job. What education do employers prefer? MBA or CFA?

    If you are looking specifically for an investment banking position, an MBA may be marginally preferable over the CFA. The caveat here is that the MBA would most probably need to be from a Top-20 B-School.The Chartered Financial Analyst (CFA) is well worth considering if you (a) are aiming for an entry-level position in investment banking, and/or (b) cannot afford to shell out six figures for an MBA or have to settle for a lesser-known B-school.That's because in the investment banking field, most entry-level positions are at the analyst level.
  3. Can I still pass the CFA Level I if I do poorly in the ethics section?

    You may still pass the Chartered Financial Analysis (CFA) Level I even if you fare poorly in the ethics section, but don't count on it. The CFA Institute has long emphasized that ethics is a particular area of focus for it. The seriousness with which the CFA Institute views ethics is evident from the fact that for exam candidates with borderline total scores, performance on the ethics section can mean the difference between passing and failing the exam.
  4. Under the USA, registration as an IAR includes all of the following EXCEPT:

    Under the USA, registration as an IAR includes all of the following EXCEPT: A. Minimum net capitalB. Passing a qualification examC. Filing a consent to service of processD. Posting a surety bond The correct answer is "A", since only an IA would need to prove minimum net capital requirements.