Multiple Choice - Modigliani and Miller

Which of the following statements about dividend policies is CORRECT?

a. 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.
b. One reason that companies tend to avoid stock repurchases is that dividend payments are taxed at a lower rate than stock repurchases.
c. One advantage of dividend reinvestment plans is that they allow shareholders to avoid paying taxes on the dividends that they choose to reinvest.
d. One key advantage of a residual dividend policy is that it enables a company to follow a stable dividend policy.
e. The clientele effect suggests that companies should follow a stable dividend policy.

Which of the following statements is CORRECT?

a. The tax code encourages companies to pay dividends.
b. If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase.
c. The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
d. Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firmâ??s financial risk.
e. A dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in dividends. Thus, both companies and investors are indifferent between distributing cash through dividends and stock repurchase programs.