15. An investor is more likely to prefer a high dividend payout if a firm: a. Ha

Question

15. An investor is more likely to prefer a high dividend payout if a firm: a. Has high flotation costs. b. Has few, if any, positive net present value projects. c. Has lower tax rates than the investor. d. Has a stock price that is increasing rapidly. e. Offers substantial gains on its equities, which are taxed at a favorable rate. 16. All else constant, which one of the following will inrease a firm's cost of equity if the finm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2 a. A reduction in the dividend amount. b. An increase in the dividend amount. c. A reduction in the market rate of return. d. A reduction in the firm's beta. e. A reduction in the risk-free rate. 17. If a firm uses its WACC as the discount rate for all of the projects it undertakes, then the firm will tend to do all of the following except: a. Reject some positive net present value projects. b. Lower the average risk level of the firm over time

Explanation / Answer

15. Correct option is b. Has few, if any, positive net present value projects.
Reason: If firm does not have enough projects to invest then investors would prefer dividend payout from the firm over retained earnings.
16. Correct option is e. A reduction in the risk free rate.
As a result of decrease in the risk free rate, the cost of capital of the firm would increase other things remaining same, according to security line approach.  

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