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 depends upon how the firm is financed.
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 depends on the amount and type of financing the firm uses. Different types of financing come with different risks, and the method chosen affects the overall risk of the firm. Therefore, statement C is correct. Statement A is misleading as the optimal dividend policy is determined by considering various factors, not just shareholder satisfaction. Statement B is incorrect because the use of debt financing affects EPS and stock price by increasing the risk of the firm. Statement D is partially correct, but the timing of the earnings stream can also impact stock price as investors may value more consistent or predictable earnings. Statement E is incorrect as dividend policy is usually decided by the management and board of directors, not directly by the shareholders.

Which of the Following Statements Is Correct