1. Dividend policy 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. 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: dividend irrelevance theory. o the signaling hypothesis. the residual dividend policy. the clientele effect. Consider the case of Purple Sage Producers Inc., and answer the question that follows: Purple Sage 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? It maximizes the firm's return on equity. It maximizes the firm's total assets. It maximizes the firm's earnings per share. It maximizes the firm's stock price. 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 more relevant than it is for an individual investor. less Another firm, called Cheatum Power & Water, an established public utility company, has been paying dividends for the past 20 years. This year Cheatum also announced that it will increase its dividends by 10%. Which class of investors is more likely to be pleased by Cheatum's dividend announcement? Investors with low tax rates who depend on current dividend income for living expenses Investors with high tax rates who don't depend on current dividend income for living expenses A firm's dividend policy determines its current clientele of investors. past future Grade It Now Save & Continue Continue without saving