2. Other dividend policy issues The term clientele effect refers to the tendency

Question

2. Other dividend policy issues The term clientele effect refers to the tendency of firms to attract investors who like their dividend policies. Three potential investors are described in the table. Indicate which type of firms they are most likely to be attracted to. Potential Investors Types of Firms Stockholders in their peak earning years Investors who have a preference for current investment income Retired individuals, pension funds, and university endowment funds Primatech Goods Corp. is a typical company that is very concerned with meeting investors' expectations and keeping investors happy. Its earnings tend to fluctuate from year to year because of the nature of the business the company is in. Which of these statements most likely describes Primatech Goods Corp.'s dividend policy? O Primatech Goods Corp. most likely pays very large dividends in years with high earnings and small dividends in the years with low earnings. O Despite the fact that Primatech Goods Corp.'s earnings tend to fluctuate from year to year, the company most likely pays a predictable, stable dividend each year.

Explanation / Answer

Primatech goods corp is a typical company concerned with meeting investors expectation and keeping investors happy. The statement Despite the fact that Primatech Goods Corp earnings tend to fluctuate from year to year the company most likely pays a predictable, stable dividend each year. Shareholders typically prefer dividends.

Potential investor type of firm Stock holders in their peak earning years Prefer investing in firms with reinvestment, since they have less requirement of current investment income and prefer getting the dividend reinvested. Low dividend payout firms Investor have preference for current investor income High Dividend payout firms retired pension fund, university endowment High dividend payout ratio. they are in need of regular income in the form of dividends

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