Asked by Moriah Foster on Jul 13, 2024
Verified
Which of the following statements is correct?
A) One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
B) If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy.
C) If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever the firm's investment opportunities improve.
D) Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.
Dividend Reinvestment Plans
Investment plans that allow shareholders to automatically reinvest their cash dividends in additional shares of the company's stock, usually without commission.
Strict Residual Dividend Policy
A dividend policy in which dividends are based on the earnings left over after all operating expenses, taxes, and project investments are covered.
Dividend Payout Ratio
The percentage of earnings paid to shareholders in dividends, calculated as dividends per share divided by earnings per share.
- Acquire insight into the core tenets and ramifications of dividend policy theories, notably the signaling theory and the clientele effect.
- Comprehend the residual dividend policy and its effect on dividend payment.
Verified Answer
AM
Arooj MalikJul 17, 2024
Final Answer :
B
Explanation :
B) is correct because a strict residual dividend policy implies that dividends are paid out from leftover earnings after all suitable investment opportunities are funded. If a company has investors who prefer high dividends, deviating from this policy to maintain higher, consistent dividends could keep these investors satisfied, as opposed to strictly following the residual policy which could result in fluctuating dividends based on investment opportunities and earnings.
Learning Objectives
- Acquire insight into the core tenets and ramifications of dividend policy theories, notably the signaling theory and the clientele effect.
- Comprehend the residual dividend policy and its effect on dividend payment.