A firm\'s value depends on its expected free cash flow and its cost of capital.

Question

A firm's value depends on its expected free cash flow and its cost of capital. Distributions made in the form af dividends or stock repurchases impact the firm's value and the investors in different ways. Savwy Camel Trucking Company's CFo has stated that the frm will pay dividends only if acceptable capital budgeting opportunities do not exist. Which concept did the CFO most likely base her decision on? O The free cash flow hypothesis O Dividend irrelevance theory O The signaling hypothesis O The clientele effect Suppose a firm generates a lot of cash but has limited investment opportunities. Is this stock more likely to be a utlity stock or a technology stock? In addition, is the stook more likely to provide a high or low dividend yield? O A utility stock that has a high dividend yield O A technology stock that has a low dividend yield O A technology stock that has a high dividend yield O A utility stock that has a low dividend yield Modigliani and Miler argued that each shareholder can construct his or her own dividend policy. This statement is: O False O True Modigliani and Miller also pointed out that many institutional investors do not pay taxes and can buy and sell stocks with very low transaction costs. For these investors, dividend policy is investor. relevant than it is for an individua Another firm, called Robbem Power & Water, an established pubic utility company, has been paying dividends for the past 20 years. This year Robbem also announced that it will increase its dividends by 10%, which dass of investors is more likely to be pleased by Robbem's dividend announcement? O Investors with high tax rates who don't depend on current dividend income for living expenses O Investors with low tax rates who depend on current dividend income for living expenses A firm's dividend policy determines its current clientele of investors

Explanation / Answer

1) CFO has most likely based her decision on free cash flow hypothesis where they decide to pay dividends only if no other investment plan exists.

2) The stock would be utility stock with high dividend yeild. Utility stock companies have limited investment plans and so they provide high dividend to the shareholders.

3) True, As per MM the shareholders can construct their own dividend policy as as per them the dividend is irrevelent and shareholder can decide where to invest and earn higher returns.

4) Modigliani and miller also pointed out that many institutional investors do not pay taxes and can buy and sell stocks with very low transaction costs. For these investors, dividend policy is Less relevant than it is for an individual investor.

5) With Robbem's policy Investors with low taxes who depend on current dividend income for living expenses would be more pleased.

6) A firm's Past dividend policy determines its current clientele of investors.

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