Question

3. Which of the following statements about dividend is NOT true? Bird-in-the-hand theory says that investors...

3. Which of the following statements about dividend is NOT true?

  1. Bird-in-the-hand theory says that investors think dividends are less risky than potential future capital gains, so they like dividends.
  2. Tax preference theory indicates that low dividend payments mean higher capital gains. Capital gains taxes are lower than dividend taxes, and they can be deferred. So investors prefer low-dividend-payments or non-dividend-payments firms.           
  3. Based on the Bird-in-the-hand theory, a firm should set high dividend payout ratio to increase firm value
  4. Based on the Tax preference theory, a firm should pay more dividends to increase firm value.
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Based on the Tax preference theory, a firm should pay more dividends to increase firm value. This statement is not true.

Tax preference theory states that the lower the dividend, lower will be taxes and also taxes are deferred. It also leads to higher growth. So they prefer lower dividends.

Therefore, Option 4 is correct.

NOTE: The answer to your question has been given below/above. If there is any query regarding the answer, please ask in the comment section. If you find the answer helpful, do upvote. Help us help you.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1. Tax effect theory of dividend payout assumes that A.Dividends are taxed at a lower rate...
1. Tax effect theory of dividend payout assumes that A.Dividends are taxed at a lower rate than capital gains tax B. Dividends are taxed at a higher rate than capital gains tax C. Investors prefer higher dividend payout D.Investors are indifferent to dividend payment 2. One of the ways that debt affects management behavior is that it increases agency cost. A. True B. False 3. Studies have shown that stock prices fall by round 90% of the dividend payments over...
2. Dividend Payout Ratios in Russia tend to be higher than in the United States. This...
2. Dividend Payout Ratios in Russia tend to be higher than in the United States. This implies which of the following? Investors in Russia are more likely to believe in the Bird-In-the-Hand Theory since they do not trust Russian Accounting. Investors in the US do not believe in any dividend theory. Russian Investors are more like to follow the tax preference theory since Russia has lower taxes than the United States. No dividend theory is implied from this information.
1) (T/F) A put warrant gives an investor the right to sell a security. Select one:...
1) (T/F) A put warrant gives an investor the right to sell a security. Select one: True False 2) (T/F) In the Tax Effect Theory of Dividends, investors prefer a higher dividend payout so they can write more off on their taxes. Select one: True False 3) Is financial leverage an issue for a firm when taking on additional debt or additional equity? Select one: a. Financial leverage is an issue of a firm’s debt usage b. Financial leverage is...
According to Bhattacharya 1979 outside investors have imperfect information about firms' profitability and that cash dividends...
According to Bhattacharya 1979 outside investors have imperfect information about firms' profitability and that cash dividends are taxed at a higher rate than capital gains. It is shown that under these conditions, such dividends function as a signal of expected cash flows. By structuring the model so that finite-lived investors turn over continuingprojects to succeeding generations of investors, we derive a comparative static result that relates the equilibrium level of dividend payout to the length of investors' planning horizons.   Question:...
A firm’s value depends on its expected free cash flow and its cost of capital. Distributions...
A firm’s value depends on its expected free cash flow and its cost of capital. Distributions made in the form of dividends or stock repurchases impact the firm’s value and the investors in different ways. Consider the scenario, and answer the questions that follow: Suppose a firm generates a lot of cash but has limited investment opportunities. Is this stock more likely to be a utility stock or a technology stock? In addition, is the stock more likely to have...
3. Suppose the corporate tax rate is 40%, investors pay a tax rate of 20% on...
3. Suppose the corporate tax rate is 40%, investors pay a tax rate of 20% on income from dividends or capital gains and a tax rate of 30% on interest income. Rally, Inc., currently an all-equity firm, is considering adding permanent debt through a levered recapitalization (Rally plans to raise 300 million through debt and payout the proceeds to shareholders). Interest Rally will be paying each year is expected to be $15 million. Rally will pay this interest expense by...
A firm has followed an historical pattern of raising its dividend by 5 to 7 percent...
A firm has followed an historical pattern of raising its dividend by 5 to 7 percent every year. However, at the annual meeting held today, the Board of Directors declared a dividend increase of 12 percent. The stock price rose after the announcement because: A. Of the tax preference argument. B. It is viewed as a positive signal about the firm’s future cash flows. C. Of the M&M dividend irrelevance argument. D. The share price would not increase because investors...
Which of following statements is not correct? (explain why D is correct answer) a) Accounts payable,...
Which of following statements is not correct? (explain why D is correct answer) a) Accounts payable, accruals, and deferred taxes are not sources of funding that come from investors, so they are not included in the calculation of the cost of capital. b)Capital components are sources of funding that come from investors: debt, preferred stock, common equity. c) Tax effects associated with financing can be incorporated either in capital budgeting cash flows or in cost of capital. d) The cost...
/ 3 9. Stocks that don't pay dividends yet Goodwin Technologies, a relatively young company, has...
/ 3 9. Stocks that don't pay dividends yet Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $5.25000 dividend at that time (D₃ = $5.25000) and believes that the dividend will grow by 27.30000% for the following two years (D₄ and D₅). However, after the fifth year, she expects...
Which of the following statements is NOT true about strategic alliances? Strategic alliances refer to cooperative...
Which of the following statements is NOT true about strategic alliances? Strategic alliances refer to cooperative agreements between potential or actual competitors. A firm that enters long-term alliances is expanding its strategic flexibility by committing to its alliance partners. Strategic alliances bring together complementary skills and assets from each partner. Joint venture is not a type of strategic alliances. As compared to exporting and licensing, FDI may be more expensive and risky. True False Which of the following is not...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT