CFA® Level 1 Exam: Most Correct Statement

Most Correct Statement

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Question

Which of the following statements is most correct?

Answers

A. If it could be demonstrated that a clientele effect exists, this would suggest that firms could alter their dividend payment policies from year to year to take advantage of investment opportunities without having to worry about the effects of changing dividends on capital costs.

B. Each of these statements are false.

C. If a company raises its dividend by an unexpectedly large amount, the announcement of this new and higher dividend is generally accompanied by an increase in the stock price. This is consistent with the bird-in-the-hand theory, and Modigliani and Miller used these findings to support their position on dividend theory.

D. If the dividend irrelevance theory (which is associated with the names Modigliani and Miller) were exactly correct, and if this theory could be tested with "clean" data, then we would find, in a regression of dividend yield and capital gains, a line with a slope of -1.0.

E. The tax preference and bird-in-the-hand theories lead to identical conclusions as to the optimal dividend policy.

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Explanations

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A. B. C. D. E.

The main conclusion of MM's irrelevance theory is that dividend policy does not affect the required rate of return on equity. MM theorized that k(s) is independent of dividend policy, implying that investors are indifferent between dividends and capital gains.

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