1. Dividend policy A firm's value depends on its expected free cash fiow and its cost of capital. Distributions made in the form of idends or stock repurchases impact the firm's value and the investors in different ways. In some cases, analysts notice that groups of similar investors tend to flock to stocks that have dividend policies consistent with their financial needs. This circumstance is an illustration of: O The free cash flow hypothesis O The signaling hypothesis O The residual dividend policy O 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 and has some free cash flow that is not expected to be used to finance future growth or potential investment projects. The company plans to distribute its free cash flow to its shareholders but is still deciding whether the distribution should take the form of a stock repurchase or the payment of a cash dividend. Which of the following is a characteristic of a firm's optimal dividend policy? O It maximizes the firm's stock price. O It maximizes the firm's return on equity. O It maximizes the firm's earnings per share. O It maximizes the firm's total assets. Which of the following statements is true? O Taxes on dividend income s are paid when the stock is sold. O Taxes on dividend income are paid in the year that they are received. As a result, the U.S. tax code encourages many individual investors to prefer to receive dividends capital gains