Question Details

Myron Gordon and John Lintner believe that the required return on equity increases  


 .	In the real world, dividends

a.	are usually more stable than earnings.
b.	fluctuate more widely than earnings.
c.	tend to be a lower percentage of earnings for mature firms.
d.	are usually changed every year to reflect earnings changes, and these changes are randomly higher or lower, depending on whether earnings increased or decreased.
e.	are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS will equal $0.80.  Once the percentage is set, then dividend policy is on “automatic pilot” and the actual dividend depends strictly on earnings.
 .	You own 100 shares of Troll Brothers’ stock, which currently sells for $120 a share.  The company is contemplating a 2-for-1 stock split.  Which of the following best describes what your position will be after such a split takes place?

a.	You will have 200 shares of stock, and the stock will trade at or near $120 a share.
b.	You will have 200 shares of stock, and the stock will trade at or near $60 a share.
c.	You will have 100 shares of stock, and the stock will trade at or near $60 a share.
d.	You will have 50 shares of stock, and the stock will trade at or near $120 a share.
e.	You will have 50 shares of stock, and the stock will trade at or near $60 a share.

 .	Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased.  Their argument is based on the assumption that

a.	investors are indifferent between dividends and capital gains.
b.	investors require that the dividend yield and capital gains yield equal a constant.
c.	capital gains are taxed at a higher rate than dividends.
d.	investors view dividends as being less risky than potential future capital gains.
e.	investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains.


 .	Which of the following should NOT influence a firm- dividend policy decision?

a.	The firm- ability to accelerate or delay investment projects.
b.	A strong preference by most shareholders for current cash income versus capital gains.
c.	Constraints imposed by the firm- bond indenture.
d.	The fact that much of the firm- equipment has been leased rather than bought and owned.
e.	The fact that Congress is considering changes in the tax law regarding the taxation of dividends versus capital gains.

 .	Which of the following statements about dividend policies is CORRECT?

a.	Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains.  They call this the “bird-in-the hand” effect.
b.	One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases.
c.	One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.
d.	One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.
e.	The clientele effect suggests that companies should follow a stable dividend policy.



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