Which of the following statements is correct?
A) The optimal dividend policy is the one that satisfies the shareholders because they supply the firm's capital.
B) The use of debt financing has no effect on earnings per share (EPS) or stock price.
C) The riskiness of projected EPS can impact the firm's value.
D) Stock price is dependent on the projected EPS and the use of debt but not on the timing of the earnings stream.
E) Dividend policy is one aspect of the firm's financial policy that is determined directly by the shareholders.

Question

Quizplus · Accepted Answer

The riskiness of projected EPS can impact the firm's value because a higher level of risk will typically result in a higher discount rate being applied to the firm's expected cash flows, which will lower its present value. Option A is incorrect because the optimal dividend policy is a balance between retaining earnings for future growth opportunities and paying dividends to shareholders. Option B is incorrect because the use of debt financing can affect EPS through its impact on interest expense and the number of shares outstanding due to the issuance of debt securities. Option D is incorrect because the timing of the earnings stream can also impact the stock price, particularly if investors are concerned about the sustainability of current profits or the future growth prospects of the firm. Option E is also incorrect because the board of directors ultimately decides on the dividend policy based on various factors, including the needs of the business and the desires of investors.

Which of the Following Statements Is Correct