1. Dividend policy Aa Aa A firm\'s value depends on its expected free cash flow
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1. Dividend policy Aa Aa A firm'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 power and the business risk of the firm. Which of these concepts would support these analysts' argument? The free cash flow hypothesis Dividend irrelevance theory O The signaling hypothesis The clientele effect Consider the scenario, and answer the question that follows: Scorecard Corp. is an oil drilling company. The company paid a dividend of $1.75 last year, and in the past its dividend has increased steadily by about 4% a year. Scorecard Corp. just announced that its dividend will increase to $2.50 this year, and its stock price rose from $30 to $33 immediately after the announcement Which of these best explains why the stock price increased as it did? O The signaling hypothesis The clientele effect Dividend irrelevance theory Which of these statements is true? Taxes on dividends are paid when the stock is sold Taxes on dividends are paid in the year that they are received Consequently, the tax code encourages many individual investors to prefer Another firm, called Lootem Power & Water, an established public utility company, has been paying dividends for the past 20 years. This year Lootem also announced that it will increase its dividends by 10%. which class of investors is more likely to be pleased by Lootem's dividend announcement? Investors with low tax rates who depend on current dividend income for living expenses Investors with high tax rates who don't depend on current dividend income for living expenses A firm's dividend policy determines its current clientele of investorsExplanation / Answer
Answer 1a) Dividend Irrelavance theory
As per Dividend Irrelavance theory, neither the price of firm's stock nor its cost of capital are affected by its dividend policy. Only the company's ability to earn money and riskiness of its activity can have an impact on its value. It was given by Modigiliani and Miller.
Ans 1b) The Signalling Hypothesis
As per Signalling Hypothesis, Dividend signaling is a theory that suggests company announcements of an increase in dividend payouts act as an indicator of the firm possessing strong future prospects.
Ans 1c) Taxes on the dividend are paid in the year that they are received.
Ans 1d) Investors with low tax rates who depend on dividend income for living expenses.
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