If you were to argue that the firm's cost of equity,r_s,increases as the dividend payout decreases,you would be making an argument ____ with MM's dividend irrelevance theory,and ____ with the theory that investors prefer dividends received in the current period rather than capital gains received in the future. A) consistent;consistent B) inconsistent;consistent C) consistent;inconsistent D) inconsistent;inconsistent E) The argument above does not make sense;neither theory involves the cost of equity capital.

Question

Quizplus · Accepted Answer

The argument that the firm's cost of equity increases as the dividend payout decreases is inconsistent with MM's dividend irrelevance theory, which states that the firm's value is independent of its dividend policy. However, it is consistent with the theory that investors prefer dividends received in the current period rather than capital gains received in the future, as a lower dividend payout may signal to investors that the firm has fewer profitable investment opportunities and may result in lower future earnings and stock price growth. Therefore, the argument is inconsistent with one theory and consistent with another.

If You Were to Argue That the Firm's Cost of Equity,rs,increases

If You Were to Argue That the Firm's Cost of Equity,r_s,increases