3. 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. Red Dirt Producers Inc. is an all 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 now 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 polley? It maximizes the firm's return on equity. It maximizes the firm's earnings per share. It maximizes the firm's total assets It maximizes the firm's stock price. 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 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