Firm M is a mature firm in a mature industry.Its annual net income and net cash flows are both consistently high and stable.However,M's growth prospects are quite limited,so its capital budget is small relative to its net income.Firm N is a relatively new firm in a new and growing industry.Its markets and products have not stabilized,so its annual operating income fluctuates considerably.However,N has substantial growth opportunities,and its capital budget is expected to be large relative to its net income for the foreseeable future.Which of the following statements is correct?

A) Firm M probably has a lower debt ratio than Firm N.
B) Firm M probably has a higher dividend payout ratio than Firm N.
C) If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
D) Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income.

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ADEBOLA BABABUNMI · Accepted Answer

Final Answer : B, Explanation :  Firm M, being in a mature industry with stable and high net income but limited growth prospects, is more likely to distribute a higher portion of its earnings as dividends. This contrasts with Firm N, which, being in a growth phase, would likely reinvest most of its earnings to fuel further growth.

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