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Assume tax rates are the same for dividends and capital gains, and that stockholders have exactly the same information as the managers who make the financial decisions of the firm. If the managers always make rational investment decisions—that is, they purchase only positive net present value capital budgeting projects—which of the following dividend policies should investors prefer the managers follow? Consider everything else is equal.
a. residual dividend
b. constant payout ratio
c. stable, predictable dividend
d. low regular dividend plus extras
e. It shouldn't matter which dividend policy the managers follow because each policy should maximize the value of the firm.
The first thing you need to do is probably ask me questions: 1. What questions (and why) might you have before you start your assignment? 2. What would your recommendation be based on?
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