Question

In: Finance

1. Another name for the bird-in-hand theory of dividend is? A. Dividend irrelevance theory B. Tax...

1. Another name for the bird-in-hand theory of dividend is?

A. Dividend irrelevance theory

B. Tax Effect Theory

C. Dividend preference theory

D. Signaling hypothesis

2. According to the tax effect theory of dividend, stockholders

A. prefer less dividend payouts

B. prefer more dividend payouts

C. are indifferent to dividend payouts

D. prefer stock splits

3.Which of the following affects the ability of a firm to take full advantage of tax shield offered by debt?

A.High level of debt increases the threat of bankruptcy

B.Debt reduces the value real options

C.Debt increases the value of real options

D.High level of debt reduces the threat of bankruptcy

E.Debt offered the option to expand production if the product is successful.

Expert Solution

1) Correct option is C.

Another name for the bird-in-hand theory of dividend is Dividend preference theory.

Myron Gordon has proposed a model suggesting dividend policy is relevant as investors prefers current dividend as against future uncertain capital gains.In other words, dividends are more certain for investors than capital gain. They would not accept the proposal to decrease dividend payout in order to increase retained earnings and get bigger capital gains in the future.

2)Correct answer is A.

According to the tax effect theory of dividend, stockholders prefer less dividend payouts.

This theory claims that investors prefer lower payout companies for tax reasons as unlike dividend, long-term capital gains allow the investor to defer tax payment until they decide to sell the stock. Also the tax rate on dividends are more than the tax rates on capital gains.

3)Correct answer is A.

High level of debt increases the threat of bankruptcy.

The risk of defaulting on, or being unable to repay, your debt increases as the debt is increase. This increase the chances of financial distress for the company.A reasonable amount of debt can help you grow your small business, but too much can overburden you with high interest payments. If you fail to make these interest payments, creditors might take your company’s assets or force you into bankruptcy.

Hope it helps!

jeff jeffy answered 2 years ago

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