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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.
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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.

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