Despite some theoretical assertions, many investors do care a great deal about dividends. They believe that sure dividends today (a bird in the hand) are less risky than a return in the form of capital gains in the future. The following table lists some factors that might affect an investor's preference for dividends. Indicate whether the given factors are likely to make an investor prefer to receive more or fewer dividends. Investors Will Likely Prefer. .. Factor More Dividends Fewer Dividends Investors expect a reliable annual cash flow from their stock portfolios. With capital gains, shareholders in high tax brackets have the ability to defer taxes into the future. The value of a dividend received today is known, but the value of a capital gain received in the future is uncertain. In examining investors' preferences for dividends, it is useful to begin with the concept of dividend irrelevance. Dividend irrelevance suggests that in a world with no market frictions or taxes, firms and investors are indifferent to the paying or receiving of dividends. However, as these restrictions are relaxed, various factors suggest that firms should pursue high or low payouts. One such factor is: Some investors have a desire for current income from their investments. Based on the factor given, identify whether investors, in general, will tend to favor high or low payout ratios. Favor a high payout Favor a low payout Erin and Mia are finance researchers and are discussing the Modigliani and Miller (MM) dividend irrelevance theory. Based on your understanding of MM's argument and the impact of the assumptions applied to the argument, fill in the missing parts of their conversation. Erin Modigliani and Miller (MM) dividend irrelevance theory is based on several assumptions. However, in the real world, these assumptions don't apply. Mia True. Issuance or flotation costs impact dividend policy decisions, and companies do care about whether to retain earnings or distribute dividends. ... Erin You are right, Mia. Due to the issuance costs with new equity sales, companies tend to make more desirable. dividend payout earnings retention Mia If a company pays out dividends and needs funds to invest in profitable projects, it would need to generate capital through new stock issues, which is expensive than using internal cash flow. less more Despite some theoretical assertions, many investors do care a great deal about dividends. They believe that sure dividends today (a bird in the hand) are less risky than a return in the form of capital gains in the future. The following table lists some factors that might affect an investor's preference for dividends. Indicate whether the given factors are likely to make an investor prefer to receive more or fewer dividends. Investors Will Likely Prefer. .. Factor More Dividends Fewer Dividends Investors expect a reliable annual cash flow from their stock portfolios. With capital gains, shareholders in high tax brackets have the ability to defer taxes into the future. The value of a dividend received today is known, but the value of a capital gain received in the future is uncertain. In examining investors' preferences for dividends, it is useful to begin with the concept of dividend irrelevance. Dividend irrelevance suggests that in a world with no market frictions or taxes, firms and investors are indifferent to the paying or receiving of dividends. However, as these restrictions are relaxed, various factors suggest that firms should pursue high or low payouts. One such factor is: Some investors have a desire for current income from their investments. Based on the factor given, identify whether investors, in general, will tend to favor high or low payout ratios. Favor a high payout Favor a low payout Erin and Mia are finance researchers and are discussing the Modigliani and Miller (MM) dividend irrelevance theory. Based on your understanding of MM's argument and the impact of the assumptions applied to the argument, fill in the missing parts of their conversation. Erin Modigliani and Miller (MM) dividend irrelevance theory is based on several assumptions. However, in the real world, these assumptions don't apply. Mia True. Issuance or flotation costs impact dividend policy decisions, and companies do care about whether to retain earnings or distribute dividends. ... Erin You are right, Mia. Due to the issuance costs with new equity sales, companies tend to make more desirable. dividend payout earnings retention Mia If a company pays out dividends and needs funds to invest in profitable projects, it would need to generate capital through new stock issues, which is expensive than using internal cash flow. less more