Which of the following statement completions is correct? If investors prefer div

Question

Which of the following statement completions is correct? If investors prefer dividends to capital gains, then

A. The equilibrium return, rs, will not be affected by a change in dividend policy because tax effects will offset these preferences.
B. rs will decrease as dividends are reduced.
C. rs will increase as dividends are reduced.
D. rs will decrease as the retention rate increases.
E. Dividend policy as determined by the residual dividend model is the only dividend policy which will maximize the price per share of common stock.

Explanation / Answer

B. rs will decrease as dividends are reduced.

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