1. If the information content, or signaling, hypothesis is correct, changes in dividend policy can be important because investors view dividend changes as signals of managements view of the future.

True

False

2. If a firm adopts a residual distribution policy, distributions are determined as a residual item. Therefore, the better the firm's investment opportunities, the lower its distributions should be.

True

False

3. Which of the following statements about dividend is NOT true?

1. Bird-in-the-hand theory says that investors think dividends are less risky than potential future capital gains, so they like dividends.
2. Tax preference theory indicates that low dividend payments mean higher capital gains. Capital gains taxes are lower than dividend taxes, and they can be deferred. So investors prefer low-dividend-payments or non-dividend-payments firms.
3. Based on the Bird-in-the-hand theory, a firm should set high dividend payout ratio to increase firm value
4. Based on the Tax preference theory, a firm should pay more dividends to increase firm value.

4.

How does debt financing help reduce agency problems which arise when managers and shareholders have different objectives?

		Debt financing can help prevent managers from using excess cash on perquisites.
		Debt financing may make managers too risk-averse, therefore causing underinvestment in some risky but positive NPV projects.
		Debt financing can help prevent managers from using excess cash on non-value adding acquisitions.
		Both A and C are correct.