x Aplia Access -FINA3000-AAplia: Student Question NA3000-A-FX Aplia: Grades take
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x Aplia Access -FINA3000-AAplia: Student Question NA3000-A-FX Aplia: Grades takeQuiz&quiz; probGuid-ONAPCOA8010100000041ebc610040000&ctxeream-0057;&ck; 1. Dividend policy Afirm's value depends on its expected free cash flow and its cost of capital. Distributions made in the form of dividends or stock repurchases impact the firm's value and the investors in different ways Some analysts have argued that a firm's value should solely be determined by its basic earning ???' and the business risk of the firm. Which of these concepts would support these analysts' argument? O Dividend irrelevance theory O The free cash flow hypothesis O The clientele effect Consider the case of Red Dirt Producers Inc, and answer the question that follows Red Dirt Producers Inc. is an oil drilling company and has some free cash flow that is not expected to be used to or potential investment projects. The company plans to distribute its free cash flow to its shareholders but is still deciding whether the distribution should take the form of a stock repurchase or the pa of a cash dividend which of the following is a characteristic of a firm's optimal dividend policy? O It maximizes the firm's earnings per share. O It maximizes the firm's return on equity. it manimozes the trms total assets which ofthe folow? statements trve O Taxes on dividend income are poid in the year that they are received O Tases on dividend income s are paid whon the stock is sold As a result, the U.S.tax code encourages many individual nvestors to prafer to Anotiher frm, caled Cheatu Power & s wwater, an established public ulity company, has been paying dvidends forExplanation / Answer
As per rules I will answer the first 4 subparts of the question
1 the free cash flow hypothesis
This hypothesis is based on the belief that the value of a firm is dependent upon the cash flows and the earning power of the business. The signalling hypothesis refers to the fact that the price of a stock depends upon the signals given by the firm. The dividend irrelevance theory says that price of stock does not depend upon dividend. As per the clientelle effect the price of a stock will move as per the demands of investors with the change in tax or dividend.
2. It maximizes the firm's stock price.
The Dividend policy should be such that it maximizes the shareholder wealth. Earnings per share and return on equity depend upon the net income and not the Dividend policy. The total Assets of the firm also do not change with the change in dividend.
3. Taxes on dividend income are paid in the year in which they are received
When the stock is sold capital gain tax is paid.
4. Dividend
Collection of taxes will be boosted when the individuals receive dividend since they have to pay tax on dividend income in the year of receipt.
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