Question

In: Finance

Which of the following statements is correct? Group of answer choices The dividend theory espoused by...

Which of the following statements is correct?

Group of answer choices

The dividend theory espoused by Modigliani and Miller would say that firms would be better served with a constant pattern of growing dividends.

The tax differential dividend theory by Litzenberger and Ramaswamy, would say that firms will be better off to pay a higher amount of dividends because the lower tax rates associated with dividends as compared to capital gains.

The bird-in-the-hand theory would say that a higher dividend ratio would be preferred because of the less uncertainty associated with a current payment.

Current research would indicate that the tax differential theory is conclusive.

The clientele effect theory indicates that certain investors like dividend policy to change as the economy changes.

Expert Solution

Which of the following statements is correct?

Option 1: The dividend theory espoused by Modigliani and Miller would say that firms would be better served with a constant pattern of growing dividends.

Explanation: The theory proposed by M&M is Dividend Irrelevance Therory which states that in a perfect world with no taxes, the dividend plocy is irrelevant.The dividend policy of a company has no effect on the stock price. So, this option is FALSE

Option 2: The tax differential dividend theory by Litzenberger and Ramaswamy, would say that firms will be better off to pay a higher amount of dividends because the lower tax rates associated with dividends as compared to capital gains.

Explanation: As per this theory, investors prefer low payout companies for tax reasons. Long tern capital gains allows investors to defer tax. So, this option is FALSE

Option 3: The bird-in-the-hand theory would say that a higher dividend ratio would be preferred because of the less uncertainty associated with a current payment.

Explanation: This therory states that investors prefer dividends over capital gains because of inherent uncertainty associated with capital gains. So, this option is CORRECT

Option4:Current research would indicate that the tax differential theory is conclusive.

Explanation: This option is FALSE as it is still uncolclusive

Option 5:The clientele effect theory indicates that certain investors like dividend policy to change as the economy changes.

Explanation: This therory states that a group of investors have similar preference when it comes to dividend policy and which suits their investment objective.This option is FALSE

jeff jeffy answered 1 year ago

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