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. Same 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? The clientele effect The signaling hypothesis The free cash flow hypothesis Dividend irrelevance theory Consider the case of Purple Sage Producers inc., and answer the question that follows: Purple Sage Producers Inc. is an oil drilling company. The company paid a dividend of $1.75 last year, and, in the past, its dividend has increased steadily by about 4% a year. Purple Sage just announced that its dividend will increase to $2.50 this year, and its share price rose from $30 per share to $33 per share immediately after the announcement. Which of the following best explains why Purple Sage's stock price increased as it did? The signaling hypothesis Dividend irrelevance theory The clientele effect Nodigliani and Niler argued that each shareholder can construct his or her own dividend policy. This statement is: False True Nodigliani and Niler 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. Same researchers and analysts have noticed a trend in which firms that increase their dividends see an increase in their stock price. The theory of explains this phenomenon. In some cases, analysts notice that groups of similar investors tend to flock to stocks that have dividend policies consistent with their needs. This circumstance is an illustration of: The information content effect The clientele effect