Question

In considering the arguments for the relevance of dividends, which of the following statements is/are correct? a. Shareholders who are risk averse may prefer some dividends over the promise of future capital gains. b. Flotation costs on new stock sales make dividend payout more desirable, rather than issuing new stock

Answer 1

Answer:

The correct answer is letter "A": Shareholders who are risk averse may prefer some dividends over the promise of future capital gains.

Explanation:

A dividend is a cash distribution by a company to its shareholders out of the profits of a period. Capital Gain refers to the increase in the value of a capital asset or an investment upon sale. From the two of them, dividends are safer investments since they do not rely exclusively on the sales of an asset.  

Thus, a conservative investor is likely to choose dividends over the promise of capital gains.