FINAL EXAM MGT 5002

MULTIPLE CHOICE CHAPTER 9
(9-5) Required return
1).

If in the opinion of a given investor a stocks expected return exceeds its required return,
this suggests that the investor thinks
a.
b.
c.
d.
e.

the stock is experiencing supernormal growth.
the stock should be sold.
the stock is a good buy.
management is probably not trying to maximize the price per share.
dividends are not likely to be declared.

(9-1) Preemptive right
2).

The preemptive right is important to shareholders because it
a.
b.
c.
d.
e.

allows managers to buy additional shares below the current market price.
will result in higher dividends per share.
is included in every corporate charter.
protects the current shareholders against a dilution of their ownership interests.
protects bondholders, and thus enables the firm to issue debt with a relatively low
interest rate.

(9-2) Classified stock
3).

Companies can issue different classes of common stock. Which of the following
statements concerning stock classes is CORRECT?
a.
b.
c.
d.
e.

All common stocks fall into one of three classes: A, B, and C.
All common stocks, regardless of class, must have the same voting rights.
All firms have several classes of common stock.
All common stock, regardless of class, must pay the same dividend.
Some class or classes of common stock are entitled to more votes per share than other
classes.
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Final exam MGT 5002

(9-5) Constant growth model
4).

If a stocks dividend is expected to grow at a constant rate of 5% a year, which of the
following statements is CORRECT? The stock is in equilibrium.
a.
b.
c.
d.
e.

The expected return on the stock is 5% a year.
The stocks dividend yield is 5%.
The price of the stock is expected to decline in the future.
The stocks required return must be equal to or less than 5%.
The stocks price one year from now is expected to be 5% above the current price.

(9-7) Corporate valuation model
5).

Which of the following statements is CORRECT?
a. To implement the corporate valuation model, we discount projected free cash flows at
the weighted average cost of capital.
b. To implement the corporate valuation model, we discount net operating profit after
taxes (NOPAT) at the weighted average cost of capital.
c. To implement the corporate valuation model, we discount projected net income at the
weighted average cost of capital.
d. To implement the corporate valuation model, we discount projected free cash flows at
the cost of equity capital.
e. The corporate valuation model requires the assumption of a constant growth rate in all
years.

(9-8) Preferred stock concepts
6).

Which of the following statements is CORRECT?
a. A major disadvantage of financing with preferred stock is that preferred stockholders
typically have supernormal voting rights.
b. Preferred stock is normally expected to provide steadier, more reliable income to
investors than the same firms common stock, and, as a result, the expected after-tax
yield on the preferred is lower than the after-tax expected return on the common
stock.
c. The preemptive right is a provision in all corporate charters that gives preferred
stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.
d. One of the disadvantages to a corporation of owning preferred stock is that 70% of
the dividends received represent taxable income to the corporate recipient, whereas
interest income earned on bonds would be tax free.
e. One of the advantages to financing with preferred stock is that 70% of the dividends
paid out are tax deductible to the issuer.

2

(9-5) Expected total return
7).

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stocks expected
total return for the coming year?
a.
b.
c.
d.
e.

7.54%
7.73%
7.93%
8.13%
8.34%

Chapter 10 – Multiple Choice
(10-6) Internal vs. external common
8).

Bankston Corporation forecasts that if all of its existing financial policies are followed,
its proposed capital budget would be so large that it would have to issue new common
stock. Since new stock has a higher cost than retained earnings, Bankston would like to
avoid issuing new stock. Which of the following actions would REDUCE its need to
issue new common stock?
a.
b.
c.
d.
e.

Increase the dividend payout ratio for the upcoming year.
Increase the percentage of debt in the target capital structure.
Increase the proposed capital budget.
Reduce the amount of short-term bank debt in order to increase the current ratio.
Reduce the percentage of debt in the target capital structure.

(10-5) Cost of equity: CAPM
9).

When working with the CAPM, which of the following factors can be determined with
the most precision?
a.
b.
c.
d.
e.

The market risk premium (RPM).
The beta coefficient, bi, of a relatively safe stock.
The most appropriate risk-free rate, rRF.
The expected rate of return on the market, rM.
The beta coefficient of the market, which is the same as the beta of an average
stock.
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Final exam MGT 5002

(10-9) Risk and projects
10).

LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its belowaverage risk projects have a WACC of 8%, and its above-average risk projects have a
WACC of 12%. Which of the following projects (A, B, and C) should the company
accept?
a.
b.
c.
d.
e.

Project B, which is of below-average risk and has a return of 8.5%.
Project C, which is of above-average risk and has a return of 11%.
Project A, which is of average risk and has a return of 9%.
None of the projects should be accepted.
All of the projects should be accepted.

(10-5) Cost of RE: CAPM
11).

O’Brien Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is
the firm’s cost of equity from retained earnings based on the CAPM?
a.
b.
c.
d.
e.

11.30%
11.64%
11.99%
12.35%
12.72%

(10-5) Cost of RE: CAPM
12).

Scanlon Inc.’s CFO hired you as a consultant to help her estimate the cost of capital. You
have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30.
Based on the CAPM approach, what is the cost of equity from retained earnings?
a. 9.67%
b. 9.97%
c. 10.28%
d. 10.60%
e. 10.93%

4

(10-5) Bond-yield-plus-risk premium
13).

A. Butcher Timber Company hired your consulting firm to help them estimate the cost of
equity. The yield on the firm’s bonds is 8.75%, and your firm’s economists believe that
the cost of equity can be estimated using a risk premium of 3.85% over a firm’s own cost
of debt. What is an estimate of the firm’s cost of equity from retained earnings?
a.
b.
c.
d.
e.

12.60%
13.10%
13.63%
14.17%
14.74%

(10-7) WACC
14).

You were hired as a consultant to Giambono Company, whose target capital structure is
40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%,
the cost of preferred is 7.50%, and the cost of retained earnings is 12.75%. The firm will
not be issuing any new stock. What is its WACC?
a. 8.98%
b. 9.26%
c. 9.54%
d. 9.83%
e. 10.12%

(Comp.) Cost of capital concepts
15).

Which of the following statements is CORRECT?
a. Since debt capital can cause a company to go bankrupt but equity capital cannot, debt
is riskier than equity, and thus the after-tax cost of debt is always greater than the cost
of equity.
b. The tax-adjusted cost of debt is always greater than the interest rate on debt, provided
the company does in fact pay taxes.
c. If a company assigns the same cost of capital to all of its projects regardless of each
projects risk, then the company is likely to reject some safe projects that it actually
should accept and to accept some risky projects that it should reject.
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Final exam MGT 5002

d. Because no flotation costs are required to obtain capital as retained earnings, the cost
of retained earnings is generally lower than the after-tax cost of debt.
e. Higher flotation costs tend to reduce the cost of equity capital.
(Comp.) Capital components
16).

Which of the following statements is CORRECT?
a. The component cost of preferred stock is expressed as rp(1 – T). This follows because
preferred stock dividends are treated as fixed charges, and as such they can be
deducted by the issuer for tax purposes.
b. A cost should be assigned to retained earnings due to the opportunity cost principle,
which refers to the fact that the firms stockholders would themselves expect to earn a
return on earnings that were paid out rather than retained and reinvested.
c. No cost should be assigned to retained earnings because the firm does not have to pay
anything to raise them. They are generated as cash flows by operating assets that
were raised in the past, hence they are free.
d. Suppose a firm has been losing money and thus is not paying taxes, and this situation
is expected to persist into the foreseeable future. In this case, the firms before-tax
and after-tax costs of debt for purposes of calculating the WACC will both be equal to
the interest rate on the firms currently outstanding debt, provided that debt was
issued during the past 5 years.
e. If a firm has enough retained earnings to fund its capital budget for the coming year,
then there is no need to estimate either a cost of equity or a WACC.

Chapter 11 – Multiple Choice
(11-2) NPV
17).

Which of the following statements is CORRECT? Assume that the project being
considered has normal cash flows, with one outflow followed by a series of inflows.
a. A projects NPV is found by compounding the cash inflows at the IRR to find the
terminal value (TV), then discounting the TV at the WACC.
b. The lower the WACC used to calculate it, the lower the calculated NPV will be.
c. If a projects NPV is less than zero, then its IRR must be less than the WACC.
d. If a projects NPV is greater than zero, then its IRR must be less than zero.
e. The NPV of a relatively low-risk project should be found using a relatively high
WACC.

6

(11-3) IRR
18).

Which of the following statements is CORRECT?
a. One defect of the IRR method is that it does not take account of cash flows over a
projects full life.
b. One defect of the IRR method is that it does not take account of the time value of
money.
c. One defect of the IRR method is that it does not take account of the cost of capital.
d. One defect of the IRR method is that it values a dollar received today the same as a
dollar that will not be received until sometime in the future.
e. One defect of the IRR method is that it assumes that the cash flows to be received
from a project can be reinvested at the IRR itself, and that assumption is often not
valid.

(11-8) Payback
19).

e.

Which of the following statements is CORRECT? Assume that the project being
considered has normal cash flows, with one outflow followed by a series of inflows.
a. The longer a projects payback period, the more desirable the project is normally
considered to be by this criterion.
b. One drawback of the payback criterion for evaluating projects is that this method
does not properly account for the time value of money.
c. If a projects payback is positive, then the project should be rejected because it must
have a negative NPV.
d. The regular payback ignores cash flows beyond the payback period, but the
discounted payback method overcomes this problem.
If a company uses the same payback requirement to evaluate all projects, say it requires a
payback of 4 years or less, then the company will tend to reject projects

(11-5) NPV and IRR
20).

Which of the following statements is CORRECT?
a. The NPV method assumes that cash flows will be reinvested at the WACC, while the
IRR method assumes reinvestment at the IRR.
b. The NPV method assumes that cash flows will be reinvested at the risk-free rate,
while the IRR method assumes reinvestment at the IRR.
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Final exam MGT 5002

c. The NPV method assumes that cash flows will be reinvested at the WACC, while the
IRR method assumes reinvestment at the risk-free rate.
d. The NPV method does not consider all relevant cash flows, particularly cash flows
beyond the payback period.
e. The IRR method does not consider all relevant cash flows, particularly cash flows
beyond the payback period.
(Comp.) Miscellaneous concepts
21).

Which of the following statements is CORRECT?
a. The IRR method appeals to some managers because it gives an estimate of the rate of
return on projects rather than a dollar amount, which the NPV method provides.
b. The discounted payback method eliminates all of the problems associated with the
payback method.
c. When evaluating independent projects, the NPV and IRR methods often yield
conflicting results regarding a project’s acceptability.
d. To find the MIRR, we discount the TV at the IRR.
e. A projects NPV profile must intersect the X-axis at the projects WACC.

(11-7) NPV profiles
22).

Which of the following statements is CORRECT? Assume that all projects being
considered have normal cash flows and are equally risky.
a. If a projects IRR is equal to its WACC, then, under all reasonable conditions, the
projects NPV must be negative.
b. If a projects IRR is equal to its WACC, then under all reasonable conditions, the
projects IRR must be negative.
c. If a projects IRR is equal to its WACC, then under all reasonable conditions the
projects NPV must be zero.
d. There is no necessary relationship between a projects IRR, its WACC, and its NPV.
e. When evaluating mutually exclusive projects, those projects with relatively long lives
will tend to have relatively high NPVs when the cost of capital is relatively high.

Chapter 12 Multiple choice
(12-1) Sunk costs
23).

Which of the following statements is CORRECT?
a. A sunk cost is any cost that must be expended in order to complete a project and bring
it into operation.
b. A sunk cost is any cost that was expended in the past but can be recovered if the firm
decides not to go forward with the project.

8

c. A sunk cost is a cost that was incurred and expensed in the past and cannot be
recovered if the firm decides not to go forward with the project.
d. Sunk costs were formerly hard to deal with, but once the NPV method came into wide
use, it became possible to simply include sunk costs in the cash flows and then
calculate the projects NPV.
e. A good example of a sunk cost is a situation where Home Depot opens a new store,
and that leads to a decline in sales of one of the firms existing stores.
(12-1) Relevant cash flows
24).

Which of the following factors should be included in the cash flows used to estimate a
projects NPV?
a. All costs associated with the project that have been incurred prior to the time the
analysis is being conducted.
b. Interest on funds borrowed to help finance the project.
c. The end-of-project recovery of any additional net operating working capital required
to operate the project.
d. Cannibalization effects, but only if those effects increase the projects projected cash
flows.
e. Expenditures to date on research and development related to the project, provided
those costs have already been expensed for tax purposes.

(12-1) Incremental cash flows
25).

Which one of the following would NOT result in incremental cash flows and thus should
NOT be included in the capital budgeting analysis for a new product?
a. A firm has a parcel of land that can be used for a new plant site or be sold, rented, or
used for agricultural purposes.
b. A new product will generate new sales, but some of those new sales will be from
customers who switch from one of the firms current products.
c. A firm must obtain new equipment for the project, and $1 million is required for
shipping and installing the new machinery.
d. A firm has spent $2 million on research and development associated with a new
product. These costs have been expensed for tax purposes, and they cannot be
recovered regardless of whether the new project is accepted or rejected.
e. A firm can produce a new product, and the existence of that product will stimulate
sales of some of the firms other products.

(12-4) Risk analysis
26).

Taussig Technologies is considering two potential projects, X and Y. In assessing the
projects risks, the company estimated the beta of each project versus both the companys
other assets and the stock market, and it also conducted thorough scenario and simulation
analyses. This research produced the following data:
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Final exam MGT 5002

Project X

Project Y

Expected NPV

$350,000

$350,000

Standard deviation (NPV)

$100,000

$150,000

Project beta (vs. market)

1.4

0.8

Correlation of the
project cash flows with
cash flows from currently
existing projects

Cash flows are not
correlated with the
cash flows from
existing projects

Cash flows are highly
correlated with the
cash flows from
existing projects

Which of the following statements is CORRECT?
a.
b.
c.
d.
e.

Project X has more stand-alone risk than Project Y.
Project X has more corporate (or within-firm) risk than Project Y.
Project X has more market risk than Project Y.
Project X has the same level of corporate risk as Project Y.
Project X has the same market risk as Project Y since its cash flows are not correlated
with the cash flows of existing projects.

(12-4) Project’s effect on firm risk
27).

A firm is considering a new project whose risk is greater than the risk of the firms
average project, based on all methods for assessing risk. In evaluating this project, it
would be reasonable for management to do which of the following?
a.
b.
c.
d.

Increase the estimated IRR of the project to reflect its greater risk.
Increase the estimated NPV of the project to reflect its greater risk.
Reject the project, since its acceptance would increase the firms risk.
Ignore the risk differential if the project would amount to only a small fraction of the
firms total assets.
e. Increase the cost of capital used to evaluate the project to reflect its higher-thanaverage risk.

(12-2) Annual CF
28).

As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a
project with the following data. What is the Year 1 cash flow?
Sales revenues

10

$13,000

Depreciation
Other operating costs
Tax rate
a.
b.
c.
d.
e.

$4,000
$6,000
35.0%

$5,950
$6,099
$6,251
$6,407
$6,568

Chapter 13 – Multiple Choice
(13-5) Flexibility option
29).

Which one of the following is an example of a flexibility option?
a. A company has an option to invest in a project today or to wait for a year before
making the commitment.
b. A company has an option to close down an operation if it turns out to be unprofitable.
c. A company agrees to pay more to build a plant in order to be able to change the
plant’s inputs and/or outputs at a later date if conditions change.
d. A company invests in a project today to gain knowledge that may enable it to expand
into different markets at a later date.
e. A company invests in a jet aircraft so that its CEO, who must travel frequently, can
arrive for distant meetings feeling less tired than if he had to fly a commercial airline.

(13-6) Risk and project selection
30).

Langston Labs has an overall (composite) WACC of 10%, which reflects the cost of
capital for its average asset. Its assets vary widely in risk, and Langston evaluates lowrisk projects with a WACC of 8%, average-risk projects at 10%, and high-risk projects at
12%. The company is considering the following projects:
Project
A
B
C
D
E

Risk
High
Average
High
Low
Low

Expected Return
15%
12%
11%
9%
6%
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Final exam MGT 5002

Which set of projects would maximize shareholder wealth?
a.
b.
c.
d.
e.

A and B.
A, B, and C.
A, B, and D.
A, B, C, and D.
A, B, C, D, and E.

(Comp.) Real options
31).

Which one of the following will NOT increase the value of a real option?
a.
b.
c.
d.
e.

Lengthening the time during which a real option must be exercised.
An increase in the volatility of the underlying source of risk.
An increase in the risk-free rate.
An increase in the cost of obtaining the real option.
A decrease in the probability that a competitor will enter the market of the project in
question.

(Comp.) Real options
32).

Gleason Research regularly takes real options into account when evaluating its proposed
projects. Specifically, it considers the option to abandon a project whenever it turns out
to be unsuccessful (the abandonment option), and it evaluates whether it is better to
invest in a project today or to wait and collect more information (the investment timing
option). Assume the proposed projects can be abandoned at any time without penalty.
Which of the following statements is CORRECT?
a. The abandonment option tends to reduce a project’s NPV.
b. The abandonment option tends to reduce a project’s risk.
c. If there are important first-mover advantages, this tends to increase the value of
waiting a year to collect more information before proceeding with a proposed project.
d. A project can either have an abandonment option or an investment timing option, but
never both.
e. Investment timing options always increase the value of a project.

(13-2) Growth option: NPV
33).

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Tutor.com is considering a plan to develop an online finance tutoring package that has the
cost and revenue projections shown below. One of Tutor’s larger competitors, Online
Professor (OP), is expected to do one of two things in Year 5: (1) develop its own
competing program, which will put Tutor’s program out of business, or (2) offer to buy
Tutor’s program if it decides that this would be less expensive than developing its own
program. Tutor thinks there is a 35% probability that its program will be purchased for

$6 million and a 65% probability that it won’t be bought, and thus the program will
simply be closed down with no salvage value. What is the estimated net present value of
the project (in thousands) at a WACC = 10%, giving consideration to the potential future
purchase?
WACC = 10.0%
Original project:
Future
Buys
Doesn’t buy
a.
b.
c.
d.
e.

0
-$3,000

1
$500

2
$500

3
$500

4
$500

Prob.
35%
65%

5
$500
$6,000
$0

$161.46
$179.40
$199.33
$219.26
$241.19

Chapter 14 – Multiple Choice
(14-2) Business risk
34).

An increase in the debt ratio will generally have no effect on which of these items?
a.
b.
c.
d.
e.

Business risk.
Total risk.
Financial risk.
Market risk.
The firm’s beta.

(14-3) Optimal capital structure
35).

Based on the information below, what is the firm’s optimal capital structure?
a.
b.
c.
d.
e.

Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.
Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.

(14-5) Leverage and cap. struct.

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Final exam MGT 5002

36).

Which of the following events is likely to encourage a company to raise its target debt
ratio, other things held constant?
a.
b.
c.
d.
e.

An increase in the corporate tax rate.
An increase in the personal tax rate.
An increase in the companys operating leverage.
The Federal Reserve tightens interest rates in an effort to fight inflation.
The company’s stock price hits a new high.

(14-3) Target capital structure
37).

The firms target capital structure should do which of the following?
a.
b.
c.
d.
e.

Maximize the earnings per share (EPS).
Minimize the cost of debt (rd).
Obtain the highest possible bond rating.
Minimize the cost of equity (rs).
Minimize the weighted average cost of capital (WACC).

(14-5) Leverage and cap. struct.
38).

Which of the following statements is CORRECT, holding other things constant?
a. Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs,
hence they tend to use relatively little debt.
b. An increase in the personal tax rate is likely to increase the debt ratio of the average
corporation.
c. If changes in the bankruptcy code make bankruptcy less costly to corporations, then
this would likely lead to lower debt ratios for corporations.
d. An increase in the companys degree of operating leverage would tend to encourage
the firm to use more debt in its capital structure so as to keep its total risk unchanged.
e. An increase in the corporate tax rate would in theory encourage companies to use
more debt in their capital structures.

(14-2) Capital struct. concepts
39).

Which of the following statements is CORRECT?
a. In general, a firm with low operating leverage also has a small proportion of its total
costs in the form of fixed costs.
b. There is no reason to think that changes in the personal tax rate would affect firms
capital structure decisions.
c. A firm with a relatively high business risk is more likely to increase its use of
financial leverage than a firm with low business risk, assuming all else equal.

14

d. If a firm’s after-tax cost of equity exceeds its after-tax cost of debt, it can always
reduce its WACC by increasing its use of debt.
e. Suppose a firm has less than its optimal amount of debt. Increasing its use of debt to
the point where it is at its optimal capital structure will decrease the costs of both debt
and equity.

(14-2) Break-even analysis
40).

Longstreet Inc. has fixed operating costs of $470,000, variable costs of $2.80 per unit
produced, and its product sells for $4.00 per unit. What is the company’s break-even
point, i.e., at what unit sales volume would income equal costs?
a.
b.
c.
d.
e.

391,667
411,250
431,813
453,403
476,073

(14-2) Break-even analysis
41).

Southwest U’s campus book store sells course packs for $15 each, the variable cost per
pack is $9, fixed costs to produce the packs are $200,000, and expected annual sales are
50,000 packs. What are the pre-tax profits from sales of course packs?
a.
b.
c.
d.
e.

$ 72,900
$ 81,000
$ 90,000
$100,000
$110,000

(14-2) Break-even analysis
42).

Your uncle is considering investing in a new company that will produce high quality
stereo speakers. The sales price would be set at 1.5 times the variable cost per unit; the
variable cost per unit is estimated to be $75.00; and fixed costs are estimated at
$1,200,000. What sales volume would be required to break even, i.e., to have EBIT =
zero?
a. 28,880
b. 30,400
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Final exam MGT 5002

c. 32,000
d. 33,600
e. 35,280

Chapter 15 – Multiple Choice
(15-3) Dividend payout
43).

In the real world, dividends
a.
b.
c.
d.

are usually more stable than earnings.
fluctuate more widely than earnings.
tend to be a lower percentage of earnings for mature firms.
are usually changed every year to reflect earnings changes, and these changes are
randomly higher to lower, depending on whether earnings increased or decreased.
e. are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS =
$2.00, then DPS would equal $0.80. Once the percentage is set, then dividend policy
is on automatic pilot and the dividend actually paid depends strictly on earnings.

(15-6) Stock split
44).

You own 100 shares of Troll Brothers’ stock, which currently sells for $120 a share. The
company is about to declare a 2-for-1 stock split. Which of the following best describes
your likely position after the split?
a.
b.
c.
d.
e.

You will have 200 shares of stock, and the stock will trade at or near $120 a share.
You will have 200 shares of stock, and the stock will trade at or near $60 a share.
You will have 100 shares of stock, and the stock will trade at or near $60 a share.
You will have 50 shares of stock, and the stock will trade at or near $120 a share.
You will have 50 shares of stock, and the stock will trade at or near $600 a share.

(15-1) Investors’ div. preferences
45).

Myron Gordon and John Lintner believe that the required return on equity increases as
the dividend payout ratio is lowered. Their argument is based on the assumption that
a.
b.
c.
d.

16

investors are indifferent between dividends and capital gains.
investors require that the dividend yield plus the capital gains yield equal a constant.
capital gains are taxed at a higher rate than dividends.
investors view dividends as being less risky than potential future capital gains.

e. investors prefer a dollar of expected capital gains to a dollar of expected dividends
because of the lower tax rate on capital gains.

(15-5) Factors in div. policy
46).

Which of the following would be most likely to lead to a decrease in a firm’s dividend
payout ratio?
a. Its earnings become more stable.
b. Its access to the capital markets increases.
c. Its research and development efforts pay off, and it now has more high-return
investment opportunities.
d. Its accounts receivable decrease due to a change in its credit policy.
e. Its stock price has increased over the last year by a greater percentage than the
increase in the broad stock market averages.

(Comp.) Dividend theories
47).

Which of the following statements about dividend policies is CORRECT?
a. Miller and Modigliani argued 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 favor distributing excess cash as dividends rather