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 of dividends or stock repurchases impact the firm's value and the investors in different ways. savy 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 Dividend irrelevance theory The clientele effect The free cash flow hypothesis O The signaling hypothesis Consider the case of Blue water Producers Inc., and answer the question that follows: Blue water Producers Inc. is an oil drilling company. The company paid a dividend of $2.80 last year, and, in the past, its dividend has increased steadily by about 4% a year. Blue water just announced that its dividend will increase to $3.75 this year, and its share price rose from $35 per share to $38 per share immediately after the announcement. which of the following best explains why Blue Water's stock price increased as it did? O Dividend irrelevance theory O The clientele effect O The signaling hypothesis Modigliani and Miller argued that each shareholder can construct his or her own dividend policy. This statement is: O False 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 individual Some researchers and analysts have noticed a trend in which firms that increase their dividends see an increase in their stock price. The theory of explains this phenomenon. In some cases, analysts notice that groups of similar investors tend to flock to stocks that have dividend policies consistent with their needs. This circumstance is an illustration of: O The information content effect O The clientele effect

Explanation / Answer

a) The free cash flow hypothesis- It states that firm value depends on Free cash flows.

b) The signalling hypothesis- Management signalled that they are dividend paying company.

c) False

d) more relevant

e)signalling - management signalling that company is growing as dividends are increasing.

f) The clientele effect

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