Question

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 time.

A. True

B. False

Answer 1

Solutions;

1.Tax effect theory of dividend payout assumes that divedend are effectively taxed at a higher rate than capital gain tax when the the investment time horizon and other facotrs are considdered.Firms that adopt this viewpoint generally have lower targeted payout ratios.

Thus correct option is 'B'

2.The given statement is true.

Introducing Debt into the picture creates potential conflict of interest because owners,managers and bondholders each have different goals,which leads to increase in agency cost.

3..The given statement is True.

stock price fall by the amount of dividend to account for the fact that new investor are not eligible to receive dividend.