Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is decreased. Their argument is based on the assumption that
A) Investors are indifferent between dividends and capital gains.
B) Investors require that the dividend yield and capital gains yield equal a constant.
C) Capital gains are taxed at a higher rate than dividends.
D) Investors view dividends as being less risky than potential future capital gains.
E) Investors value a dollar of expected capital gains more highly than a dollar of expected dividends because of the lower tax rate on capital gains.

Question

Quizplus · Accepted Answer

Myron Gordon and John Lintner's argument is based on the assumption that investors view dividends as being less risky than potential future capital gains, leading to a higher required return on equity when the dividend payout ratio is decreased.

Myron Gordon and John Lintner Believe That the Required Return