Question

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

A. investors are indifferent between dividends and capital gains 

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

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

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

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

Answer 1

Ans : Option (B)

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

Shareholders view dividends as less risky and assume capital gain as more potential . If dividend is more retained the capital gain is increased.