Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is lowered. Their argument is based on the assumption that

a. investors are indifferent between dividends and capital gains.

b. investors require that the dividend yield plus the capital gains yield equal a constant.

c. capital gains are taxed at a higher rate than dividends.

d. investors view dividends as being less risky than potential future capital gains.

e. investors prefer a dollar of expected capital gains to a dollar of expected dividends because of the lower tax rate on capital gains.

Question

Business

Austin Rivas

13 April, 16:01

Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is lowered. Their argument is based on the assumption that

a. investors are indifferent between dividends and capital gains.

b. investors require that the dividend yield plus the capital gains yield equal a constant.

c. capital gains are taxed at a higher rate than dividends.

d. investors view dividends as being less risky than potential future capital gains.

e. investors prefer a dollar of expected capital gains to a dollar of expected dividends because of the lower tax rate on capital gains.

+1

Answers (1)

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Cornelius Mcconnell · Answer 1

The answer is d. investors view dividends as being less risky than potential future capital gains.

Explanation:

This is called the "Bird in Hand theory" as well. What it says technically is that investors prefer dividends from stock investing to potential capital gains because of the inherent uncertainty associated with capital gains.

In other words, a Bird in hand worth 2 in the bush!

This is because of the inherent risk in the capital gains in the market. You can NEVER predict the future of a market. Dividend however, can be predicted along with the annual performance of a company.