A firm is said to be "smoothing" dividends if dividends:
A) are paid through an automatic dividend reinvestment plan.
B) change more gradually than changes in earnings.
C) increase by the same dollar amount each year.
D) are paid only in even dollar amounts.

Question

Quizplus · Accepted Answer

Smoothing dividends refers to the practice of keeping dividend payments relatively consistent, even if a company's earnings fluctuate from year to year. By doing so, the company is "smoothing out" the potentially volatile effects of fluctuating earnings on shareholder income. Therefore, Option B is the best choice as it suggests that dividends change more gradually than changes in earnings.

A Firm Is Said to Be "Smoothing" Dividends If Dividends