Which of the following statements is most correct?
A) The bird-in-the-hand theory implies that a company can reduce its WACC by reducing its dividend payout.
B) The bird-in-the-hand theory implies that a company can increase its stock price by reducing its dividend payout.
C) One problem with following a residual distribution policy (with all distributions in the form of dividends) is that it can lead to erratic dividend payouts that may prevent the firm from establishing a reliable clientele of investors who prefer a particular dividend policy.
D) Statements a and c are correct.
E) All of the statements above are correct.

Question

Quizplus · Accepted Answer

The bird-in-the-hand theory suggests that investors value current dividend payments more than potential future capital gains. It does not suggest that reducing dividend payout would reduce WACC or increase stock price. Option C is correct as it identifies a problem with a residual dividend policy where erratic dividend payouts can prevent a firm from establishing a reliable investor base. Options A, B, and D are incorrect.

Which of the Following Statements Is Most Correct