These questions are about payouts to owners.

(a) Is there an advantage for a firm to retain its cash instead of paying it out to shareholders as dividend payments? Explain in the case of a perfect capital market and explain how your answer may change if capital markets are not perfect.

(b) Explain how an increase in a dividend payment can be interpreted as a signal of either good news (investor wealth increase) or bad news (investor wealth decrease) specific to owning a portion of a firm paying dividends.