Which of the following is true about the dividend relevance theory? a. If invest

Question

Which of the following is true about the dividend relevance theory? a. If investors prefer capital gain on their investment, then the tax effect of dividend b. If investors prefer current income on their investment, then the tax effect of dividend c. If investors prefer current income on their investment, the required return on equity d. If investors prefer capital gain on their investment, free cash flows to equity should e. If investors prefer both capital gain and current income, the net income of the firm receipts does not have any effect on the price of stocks. receipts does not have any effect on the price of stocks. should decrease as the dividend payout is increased. decrease. should decrease.

Explanation / Answer

Answer is C.

investor prefer to receive dividend today as currend dividend payment is more certain than future capital gain that might result when a firm invests retained earnings in growth opprtunities. So, required return on equity should decrease with increase in dividend payout casuing firms stock price to increase.

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