As of December 31, 2005, two otherwise identical companies in the same industry, East Company and West Company, have dividend payouts of 20% and 40%, respectively. Looking forward one year, which outcomes are least likely?

I. East Company requires debt financing.
II. West Company increases its dividend payout.
III. West Company's share price is twice that of East Company.
IV. East Company repurchases outstanding shares.

A) I and II
B) II and IV
C) I, II, and III
D) II, III, and IV

Question

As of December 31, 2005, two otherwise identical companies in the same industry, East Company and West Company, have dividend payouts of 20% and 40%, respectively. Looking forward one year, which outcomes are least likely?

I. East Company requires debt financing.
II. West Company increases its dividend payout.
III. West Company's share price is twice that of East Company.
IV. East Company repurchases outstanding shares. 
 
A) I and II
B) II and IV
C) I, II, and III
D) II, III, and IV

Quizplus · Accepted Answer

If East Company continues to pay out 20% dividends and West Company pays out 40%, it is unlikely that West Company's share price will be twice that of East Company. This is because dividend payouts affect share prices, and if West Company increases its dividend payout, its share price may increase, but not necessarily to twice the value of East Company's share price. Additionally, if East Company wishes to raise funds for growth, it may require debt financing, and if West Company continues to increase its dividend payout, it may not have the funds available for share repurchases. Therefore, the least likely outcomes are I, II, and III, making choice C the best choice.

As of December 31, 2005, Two Otherwise Identical Companies in the Same