Assignment 14 Distributions to Shareholders: Dividends and Share Repurchases 1. Dividend policy Aa Aa A firm's value depends on its expected free cash flow and its cost of capital. Distributions made in the form of divicends 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 O The free cash flow hypothesis O The signaling hypothesis O The clientele effect O The residual dividend policy Consider the case of Red Dirt Producers Inc., and answer the question that follows: Red Dirt Producers Inc. is an oil drilling company. The company paid a dividend of $2.80 last year, and, in the past, its dividend has increased steadily by about 4% a year. Red Dirt just announced that its dividend will increase to $3.75 this year, and its share price rose from $35 per share to $38 per share immediately after the announcement. Which of the following best explains why Red Dirt's stock price increased as it did? O Dividend irrelevance theory O The signaling hypothesis O The clientele effect Which of the following statements is true? O Taxes on dividend income are paid in the year that they are received. O Taxes on dividend income s are paid when the stock is sold. As a result, the U.S. tax code encourages many individual investors to prefer to receive Another firm, called Lootem Power & water, an established public utility company, has been paying dividends for the past 20 years. This year Lootem also announced that it will increase its dividends by 10%. Which class of investors is more likely to be pleased by Lootem's dividend announcement? O Investors with low tax rates who depend on current dividend income for living expenses O Investors with high tax rates who dont depend on current dividend income for living expenses A firm's dividend policy determines its current clientele of investors. Assignment 14 Distributions to Shareholders: Dividends and Share Repurchases 1. Dividend policy Aa Aa A firm's value depends on its expected free cash flow and its cost of capital. Distributions made in the form of divicends 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 O The free cash flow hypothesis O The signaling hypothesis O The clientele effect O The residual dividend policy Consider the case of Red Dirt Producers Inc., and answer the question that follows: Red Dirt Producers Inc. is an oil drilling company. The company paid a dividend of $2.80 last year, and, in the past, its dividend has increased steadily by about 4% a year. Red Dirt just announced that its dividend will increase to $3.75 this year, and its share price rose from $35 per share to $38 per share immediately after the announcement. Which of the following best explains why Red Dirt's stock price increased as it did? O Dividend irrelevance theory O The signaling hypothesis O The clientele effect Which of the following statements is true? O Taxes on dividend income are paid in the year that they are received. O Taxes on dividend income s are paid when the stock is sold. As a result, the U.S. tax code encourages many individual investors to prefer to receive Another firm, called Lootem Power & water, an established public utility company, has been paying dividends for the past 20 years. This year Lootem also announced that it will increase its dividends by 10%. Which class of investors is more likely to be pleased by Lootem's dividend announcement? O Investors with low tax rates who depend on current dividend income for living expenses O Investors with high tax rates who dont depend on current dividend income for living expenses A firm's dividend policy determines its current clientele of investors