1. Dividend policy

1. Dividend policy Aa Aa E A firm's value depends on its expected free cash flow and its cost of capital. Distributions made in the form of dividends or stock repurchases impact the firm's value and the investors in different ways. Cloudy skies Production Company's CFO has stated that the firm will pay dividends only if acceptable capital budgeting opportunities do not exist. Which concept did the CFO most likely base her decision on? O The signaling hypothesis Dividend irrelevance theory The free cash flow hypothesis The clientele effect Consider the case of Blue Water Producers Inc., and answer the question that follows: Blue Water Producers Inc. is an oil drilling company. The company paid a dividend of $1.50 last year, and, in the past, its dividend has increased steadily by about 4% a year. Blue Water just announced that its dividend will increase to $2.10 this year, and its share price rose from $28 per share to $30 per share immediately after the announcement. Which of the following best explains why Blue Water's stock price increased as it did? Dividend irrelevance theory The clientele effect The signaling hypothesis Modigliani and Miller argued that each shareholder can construct his or her own dividend policy. This statement is: False True Modigliani and Miller also pointed out that many institutional investors do not pay taxes and can buy and sell stocks with very low transaction costs. For these investors, dividend policy is relevant than it is for an individual investor. Another firm, called Lootem Power & Water, an established public utility company, has been paying dividends for the past 20 years. This year Lootem also announced that it will increase its dividends by 10%. Which class of investors is more likely to be pleased by Lootem's dividend announcement? O Investors with high tax rates who don't depend on current dividend income for living expenses Investors with low tax rates who depend on current dividend income for living expenses A firm's dividend policy determines its current clientele of investors