Reference no: EM132614319

Problem 1: Consider two very different firms, M and N. Firm M is a mature firm in a mature industry. Its annual net income and net cash flows are both consistently high and stable. However, M's growth prospects are quite limited, so its capital budget is small relative to its net income. Firm N is a relatively new firm in a new and growing industry. Its markets and products have not stabilized, so its annual operating income fluctuates considerably. However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is correct?

a. Firm N is likely to have a clientele of shareholders who want to receive consistent, stable dividend income.

b. Firm M probably has a higher dividend payout ratio than Firm N.

c. The two firms are equally likely to pay high dividends.

d. Firm M probably has a lower debt ratio than Firm N.

e. If the corporate tax rate increases, the debt ratio of both firms is likely to decline.