Dividend Policy Quiz

According to Walter's model, if a firm's internal rate of return (r) > cost of equity (Ke), the firm should:

• Pay all earnings as dividends

• Retain all earnings for reinvestment

• Distribute half and retain half

• Avoid paying dividends and take more debt

The "Bird in the Hand" theory suggests investors prefer:

• Future capital gains over current dividends

• Current dividends over uncertain future gains

• No dividends at all

• Stock buybacks instead of dividends

In Gordon's model, the growth rate (g) is calculated as:

• g = EPS × DPS

• g = Retention Ratio × r

• g = Ke × r

• g = DPS / EPS

Which of the following is NOT an assumption of MM's dividend irrelevance theory?

• Perfect capital markets exist

• No flotation or transaction costs

• Taxes on dividends are higher than on capital gains

• Investment policy is fixed

If r < Ke, according to Walter's model, the optimal payout ratio is:

• 0%

• 50%

• 100%

• Cannot be determined

Gordon's model assumes:

• Ke > g

• g > Ke

• Ke = g

• g = 0

In MM theory, the value of the firm is:

• Affected by dividend policy

• Independent of dividend policy

• Dependent only on debt policy

• Maximized by paying high dividends

The dividend payout ratio is calculated as:

• DPS ÷ EPS

• EPS ÷ DPS

• DPS × EPS

• DPS + EPS

According to the "Bird in the Hand" theory, investors discount future dividends at a:

• Higher rate than near-term dividends

• Lower rate than near-term dividends

• Equal rate as near-term dividends

• Zero rate

Walter's model assumes investments are financed through:

• Debt only

• Retained earnings only

• New equity only

• Both debt and equity