Which of the following statements about dividend policies is correct?
A) one reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than gains on stock repurchases.
B) one advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.
C) one key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.
D) the clientele effect suggests that companies should follow a stable dividend policy.
E) modigliani and miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. they call this the "bird-in-the hand" effect.

Question

Quizplus · Accepted Answer

The clientele effect suggests that companies should follow a stable dividend policy, as investors tend to prefer companies that offer a consistent dividend payout. A residual dividend policy, as mentioned in option C, adjusts the dividend payout according to the earnings of the company and may not provide the stability that investors seek. Options A and B are incorrect as they present incorrect information regarding taxation of dividends and dividend reinvestment plans. Option E is also incorrect, as Modigliani and Miller's theory of dividend irrelevance suggests that investors are indifferent between receiving dividends and capital gains, and that dividend policy does not affect firm value.

Which of the Following Statements About Dividend Policies Is Correct