Which of the following statements is most correct?
A) The tax preference theory states that, all else equal, investors prefer stocks that pay low dividends because retained earnings can lead to capital gains that are taxed preferentially.
B) An increase in the cost of equity capital (rs) when a company announces an increase in its dividend per share would be consistent with the bird-in-the-hand theory.
C) An increase in the stock price when a company decreases its dividend is consistent with the signaling theory.
D) A dividend policy that involves paying a consistent percentage of net income is the best policy if the "clientele effect" is correct.
E) Both statements a and d are correct.

Question

Quizplus · Accepted Answer

The tax preference theory explains that investors prefer stocks that pay low dividends because retained earnings can lead to capital gains that are taxed preferentially. The statement in option A correctly explains this theory, making it the most correct statement among the given options. Option B is incorrect as an increase in dividend per share should decrease the cost of equity capital according to the bird-in-the-hand theory. Option C is also incorrect as an increase in stock price after a dividend decrease is not consistent with the signaling theory. Option D is partially correct as consistent dividend percentage is preferred when the clientele effect is correct, but it is not mentioned whether it is the best policy overall, making option A a better selection. Thus, option A is the most correct statement.

Which of the Following Statements Is Most Correct