Asked by alberto castilleja on May 12, 2024
Verified
All else the same, an investor is likely to prefer a firm with a high dividend payout if flotation costs are significant.
High Dividend Payout
A policy where a company distributes a large portion of its earnings to shareholders in the form of dividends.
Flotation Costs
Expenses incurred by a company when issuing new securities, including underwriting fees, legal fees, and registration fees.
Significant
Of considerable importance, size, or worth; likely to have influence or effect.
- Understand the determinants that sway dividend policy choices among investors.
- Comprehend the effects that flotation costs have on dividend policy choices.
Verified Answer
SL
Shara LaPeauxMay 18, 2024
Final Answer :
False
Explanation :
Flotation costs reduce the net proceeds from issuing new securities, making existing securities more attractive. However, a high dividend payout does not directly mitigate the impact of flotation costs on new securities. Investors might prefer firms that reinvest earnings (lower dividend payout) to grow, especially if flotation costs are significant, as this can lead to higher future returns without the immediate need for external financing.
Learning Objectives
- Understand the determinants that sway dividend policy choices among investors.
- Comprehend the effects that flotation costs have on dividend policy choices.