Which of the following statements is CORRECT?
A) One advantage of dividend reinvestment plans is that they enable investors to avoid paying taxes on the dividends they receive.
B) If a company has an established clientele of investors who prefer a high dividend payout, and if management wants to keep stockholders happy, it should not follow the strict residual dividend policy.
C) If a firm follows a strict residual dividend policy, then, holding all else constant, its dividend payout ratio will tend to rise whenever its investment opportunities improve.
D) If Congress eliminates taxes on capital gains but leaves the personal tax rate on dividends unchanged, this would motivate companies to increase their dividend payout ratios.
E) Despite its drawbacks, following the residual dividend policy will tend to stabilize actual cash dividends, and this will make it easier for firms to attract a clientele that prefers high dividends, such as retirees.

Question

Quizplus · Accepted Answer

A dividend reinvestment plan does not allow investors to avoid taxes on dividends. A strict residual dividend policy would not increase the payout ratio with better investment opportunities. Eliminating capital gains taxes would likely decrease, not increase, dividend payouts. The residual dividend policy does not stabilize dividends. However, if a company has investors preferring high dividends, it should not strictly follow a residual policy to keep them satisfied.

Which of the Following Statements Is CORRECT