We introduced Lecture 6 by proving the Modigliani Miller II theorem, which states that payout policy is irrelevant for firm value under a restrictive set of assumptions. We then demonstrated violations of MM II in several contexts. In particular, when tax treatment of one method of payout is different than the tax treatment of another method, we showed that payout policy is relevant for firm value. Using your understanding of the MM II theorem and the Topic 4 papers, provide detailed answers to the following questions: 1. Tax treatment of dividends vs repurchases a. Explain in detail why investors prefer repurchases over dividends even when the dividend tax rate is equal to the capital gains tax rate.

2. Costs of excess cash and the use of payout policy a. Describe two (2) costs of holding excess cash that might induce firms to pay out instead of retaining earnings. b. Describe two (2) reasons firms would repurchase stock instead of paying a dividend.