QUESTION FOUR $(25$ MARKS$)$

a$.$ M&M argued that dividend policy is irrelevant. What does this mean? Why may dividend

policy matter in the real world?

$(4$ marks$)$

b$.$ It has been argued that investors punish firms more when they reduce dividends compared

to when they increase dividends. What does this mean?

$(3$ marks$)$

c$.$ The self$-$control hypothesis posits that investors behave as if they separate dividends and

capital gains into two different mental accounts. Discuss.

$(3$ marks$)$

d$.$ In recent times an increasing number of firms seem to prefer distributing their earnings in

the form of a stock repurchase as opposed to actual cash dividends. What may account for

this trend?

$(4$ marks$)$

e$.$ Both dividend payments and borrowing can be used by investors to reduce the tendency of

managers to 'waste' free cash flows. In your opinion, which is more effective in reducing

the agency problem?

$(3$ marks$)$

f$.$ Explain the various dividend strategies that firms may employ. Which are more risky?

Which policy is a firm likely to use when it intends to list on a stock exchange?

$(8$ marks$)/$