CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

Which of the following is correct?
A. An attractive feature of using the Residual Dividend Model is the stability of dividends from one year to the next.
B. The Residual Dividend Model says that a firm retains profits it requires for financing its investment opportunities and maintaining its target Capital Structure and pays out remaining profits as dividends.
C. As per the Modigliani-Miller ideas, firms that retain more dividends grow faster than their competitors and are thus more valuable.
Explanation: As per MM, dividend policy is irrelevant. Essentially firms that pay out more dividends, could be borrowing more at the same time. And remember that in MM there are no taxes, so there is no tax-advantage to alternative means of financing (dividend non-payment or borrowing). Using the Residual Dividend Model can lead to unstable dividends.

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