QUESTION 2 Which of the following statements is correct? One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like. An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM. If the "clientele effect" is correct, then for a company whose carnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price, Stock repurchases make the most sense at times when a company believes its stock is undervalued Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios. QUESTION 3 Consider two very different firms, M and N. Firm N is a mature firm in a mature industry. Its annual net income and net cash flows are both consistently high and stable. However, N's growth prospects are quite limited, so its capital budget is small relative to its net income. Firm M is a relatively new firm in a new and growing industry. Its markets and products have not stabilized, so its annual operating income fluctuates considerably. However, M has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foresteable future. Which of the following statements is correct? Firm M probably has a higher dividend payout ratio than Firm N. If the corporate tax rate increases, the debt ratio of both firms is likely to decline. The two firms are equally likely to pay high dividends. Fim N probably has a higher dividend payout ratio than Firm M. Firm M probably has a higher debt ratio than Firm N