Match the Following

Question 177

Matching

Match the following:

Premises:

Responses:

Expectations theory

The future is uncertain, so cash in management's hands may not result in a more valuable company. Therefore a dividend distribution is preferable to retaining earnings.

Any decrease in a stock's value from reducing near-term dividends is offset by increases in future dividends and selling price that come from additional earnings retained.

A smaller dividend than expected is viewed as a negative even if it is an increase over previous dividends.

The firm first funds all viable capital budgeting projects, and then distributes any remaining earnings as dividends.

Premises:

Expectations theory

Responses:

The future is uncertain, so cash in management's hands may not result in a more valuable company. Therefore a dividend distribution is preferable to retaining earnings.

Any decrease in a stock's value from reducing near-term dividends is offset by increases in future dividends and selling price that come from additional earnings retained.

A smaller dividend than expected is viewed as a negative even if it is an increase over previous dividends.

The firm first funds all viable capital budgeting projects, and then distributes any remaining earnings as dividends.

Correct Answer:

Premises:

Responses:

The future is uncertain, so cash in management's hands may not result in a more valuable company. Therefore a dividend distribution is preferable to retaining earnings.

Any decrease in a stock's value from reducing near-term dividends is offset by increases in future dividends and selling price that come from additional earnings retained.

A smaller dividend than expected is viewed as a negative even if it is an increase over previous dividends.

The firm first funds all viable capital budgeting projects, and then distributes any remaining earnings as dividends.

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