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. Savvy Camel Trucking Company's CFO has stated that the firm will pay dividends only after all acceptable capital budgeting projects have been financed using retained earnings to the extent possible. Which concept did the CFO most likely base her decision on? Dividend irrelevance theory The residual dividend model The signaling hypothesis 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 earnings per share. It maximizes the firm's stock price. It maximizes the firm's return on equity. It maximizes the firm's total assets. Which of the following statements is true? Taxes on dividend income are paid when the stock is sold. 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 Another firm, called Robbem Power & Water, an established public utility company, hast dividends also announced that it will increase its dividends by 10%. Which class of investors is mo capital gains dends for the past 20 years. This year Robbem leased by Robbem'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. Grade It Now Save & Continue