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.

Some analysts have argued that a firm’s value should solely be determined by its basic earning power and the business risk of the firm. Which of these concepts would support these analysts’ argument?

A. The signaling hypothesis

B. Dividend irrelevance theory

C. The clientele effect

D. The residual dividend model

Suppose a firm generates a lot of cash but has limited investment opportunities. Is this stock more likely to be a utility stock or a technology stock? In addition, is the stock more likely to provide a high or low dividend yield?

A. A utility stock that has a high dividend yield

B. A utility stock that has a low dividend yield

C. A technology stock that has a low dividend yield

D. A technology stock that has a high dividend yield

Modigliani and Miller argued that each shareholder can construct his or her own dividend policy. This statement is:

A. False

B. 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 ________ relevant than it is for an individual investor.

A. more

B. less

Another firm, called Robbem Power & Water, an established public utility company, has been paying dividends for the past 20 years. This year Robbem also announced that it will increase its dividends by 10%. Which class of investors is more likely to be pleased by Robbem’s dividend announcement?

A. Investors with low tax rates who depend on current dividend income for living expenses

B. 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.

A. Future

B. Past