Answer the following statements true (T) or false (F)

Question

1. The residual theory of dividends, as espoused by Modigliani and Miller, suggests that dividends represent an earnings residual rather than an active decision variable that affects firm value; this means that a firm's decision to pay dividends or not will not have any impact on a firm's share price.
2. The representative theory of dividends, as espoused by Modigliani and Miller, suggests that dividends represent a significant active decision variable that affects firm value.
3. The clientele effect is the argument that a firm attracts shareholders whose preferences with respect to the payment and stability of dividends corresponds to the payment pattern and stability of the firm itself.
4. According to Modigliani and Miller, a firm's value is determined solely by the earning power and risk of its assets and that the manner in which it splits its earnings stream between dividends and internally retained funds does not affect this value.
5. Due to a clientele effect, Modigliani and Miller argue that shareholders with different dividend preferences align with firms with different dividend policies in such a way that the value of a firm's stock is unaffected by dividend policy.
6. According to the bird-in-the-hand argument, current dividend payments reduce investor uncertainty and result in a higher value for a firm's stock.

Answer 1

1. TRUE
2. FALSE
3. TRUE
4. TRUE
5. TRUE
6. TRUE