Question #15

Reading: Reading 15 Analysis of Dividends and Share Repurchases

PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf

Page: 7

Status: Unattempted

Correct Answer: A

Part of Context Group: Q15-17 First in Group
Shared Context
- According to Gordon, Litner, and Graham, what will be the impact of the dividend initiation on the cost of equity of Rainham Inc.? A) It will increase. B) It will decrease. C) Unchanged.
Question
Which of the following dividend policy is consistent with the Rainham Inc.'s proposed dividend policy of setting an initial dividend payout ratio to 30% and then increase this over the following five years to 70%?
Answer Choices:
A. Residual dividend model
B. Dividend stability
C. Target payout ratio
Explanation
Target payout ratio is consistent with the proposed dividend policy of Rainham Inc. Under the target payout ratio approach, the management would define a target payout ratio and move toward the target payout ratio over time.
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