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.

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:

dividend irrelevance theory.

the clientele effect.

the residual dividend policy.

the signaling hypothesis.

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 $$3\mathrm{.}10$ 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 $$4\mathrm{.}20$ this year, and its share price

rose from $$38$ per share to $$40$ 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

The clientele effect

Dividend irrelevance theory

Which of the following statements is true?

Taxes on dividend income are paid in the year that they are received.

Taxes on dividend income are paid when the stock is sold.

As a result, the U$.$S$.$ tax code encourages many individual investors to prefer to receive

Some researchers and analysts have noticed a trend in which firms that increase their dividends see an increase in their stock price. The theory of

$\text{'}.$ 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.