Assume tax rates are the same for dividends and capital gains, and that stockhol

Question

Assume tax rates are the same for dividends and capital gains, and that stockholders have exactly the same information as the managers who make the financial decisions of the firm. If the managers always make rational investment decisions—that is, they purchase only positive net present value capital budgeting projects—which of the following dividend policies should investors prefer the managers follow? Consider everything else is equal.

a. residual dividend

b. constant payout ratio

c. stable, predictable dividend

d. low regular dividend plus extras

e. It shouldn't matter which dividend policy the managers follow because each policy should maximize the value of the firm.

Explanation / Answer

correct option is "B" -constant dividend payour ratio

As capital investment project involves huge investment ,it may be possible firm may have negative cash flow in any year .so shareholders generally expectes that they are always paid with some dividend amount at a constant rate.

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