Regarding payout policy, select the correct statement:

Question

BlackTom AI · Accepted Answer

In evaluating the payout policy question, I will assess each statement to see how well it aligns with common corporate finance conventions and tax considerations.
Option A: 'Firms change their dividend per share each quarter, based on whether they have funds to pay out or not.' This description is oversimplified and not universally true. Many firms follow a stable or slowly growing dividend policy rather than adjusting quarterly purely on available funds, and some may issue special dividends or skip quarters for strategic reasons. The claim implies a strict quarterly rule tied to cash availability, which ignores policy changes, earnings stability, and signaling considerations that many studies and practices highlight.
Option B: 'Regular dividends per share are generally much larger than special (one-time) dividends per share.' While regular (ongoing) dividends are typically predictable, it is not universally the case that they are *much* larger than one-time specials. Special dividends are one-time distributions that can be large when a firm has excess cash or wants to return capital, often exceeding a regular dividend in a single instance. Therefore this statement is not reliably true across firms or situations.
Option C: 'To repurchase shares, a firm listed in the New York Stock Exchange must first identify and contact those shareholders that may want to sell shares and then negotiate the price with each of them.' This describes a negotiated, potentially private buyback process that resembles a negotiated tender or private transaction, not the standard open-market repurchase program on an exchange. In practice, most NYSE-listed firms conduct open-market repurchases or use tender offers that do not involve identifying and negotiating with each individual shareholder in the manner suggested. Hence this statement misrepresents common buyback procedures.
Option D: 'Dividends generally have a tax disadvantage in comparison to share repurchases, even when the personal tax rates on dividends and capital gains are the same.' This captures a widely discussed point in corporate finance and taxation: the tax treatment of dividends versus capital gains can make dividends less attractive to investors, partly due to the way taxes are applied (e.g., dividends taxed as ordinary income or at favorable rates depending on jurisdiction and holding period, and capital gains often taxed only when realized). Even when personal tax rates align, the preferential treatment of capital gains and the potential for tax deferral through buybacks create a distribution preference for repurchases in many tax environments. This statement aligns with common formulations about payout policy and taxation, making it plausible as the correct option.
In summary, Option A overstates the rigidity of quarterly dividend changes, Option B mischaracterizes typical dividend patterns, Option C misdescribes standard buyback processes, and Option D correctly reflects tax considerations often cited in payout policy analyses. The reasoning points to D as the statement that best matches established concepts in payout policy and taxation.

Regarding payout policy, select the correct statement:

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