Question

Dividend policy is irrelevant if:

I.

a firm does not pay any type of dividend.

II.

the clientele effect argument is correct.

III.

a firm does not pay cash dividends.

IV.

a firm’s investors are all corporate entities.

Which one of the following is defined as the equity risk that arises from the nature of a firm’s operating activities?

	I.	leverage
	II.	default
	III.	financial
	IV.	business

Answer 1

1. Dividend policy is irrelevant as the firm does not pay any kind of dividend.The companies which does not pay any kind of dividend, for such companies the dividend will be completely irrelevant.

option(I) would be true which states that Dividend policy will be irrelevant if the firm doesn't pay with any kind of dividend.

other options are not true as they state otherwise.

2. Business risk is the risk which is defined the equity risk that arises from the forms operating activities. this type of risk is related to day to day operations of business dealing with consumers and change in the sales volume.

So the correct option would be option (IV) Business risk.

Financial risk and leverage risk risk associated with debt so are false.