An investor who requires a 12% percent return for a stock that pays no dividends and requires a 9% return for a stock that pays its entire return from dividends is most likely a proponent of
A) the bird-in-the-hand dividend theory.
B) the residual dividend theory.
C) the clientele effect.
D) the information effect.

Question

Quizplus · Accepted Answer

The investor's preference for a higher return from a non-dividend paying stock suggests a belief in the bird-in-the-hand dividend theory, which states that investors prefer current dividends over potential future capital gains because they are more certain. This theory suggests that a higher required return is necessary to compensate for the lack of current dividends.

An Investor Who Requires a 12% Percent Return for a Stock