Question

ch14:1 1. Dividend policy 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. Happy Whale Shipbuilders’ CFO has stated that the firm will pay dividends only after all acceptable capital budgeting projects have been financed using retained earnings to the extent possible. Which concept did the CFO most likely base her decision on? CHOOSE A,B,C,or D

A:The residual dividend model B:Dividend irrelevance theory C:The clientele effect OR D:The signaling hypothesis

Consider the case of Purple Sage Producers Inc., and answer the question that follows: Purple Sage Producers Inc. is an oil drilling company and has some free cash flow that is not expected to be used to finance future growth 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 payment of a cash dividend. Which of the following is a characteristic of a firm’s optimal dividend policy? A,B,C,or D

A:It maximizes the firm’s stock price. B:It maximizes the firm’s earnings per share. C:It maximizes the firm’s total assets. or D:It maximizes the firm’s return on equity.

Modigliani and Miller argued that each shareholder can construct his or her own dividend policy. This statement is: True or False ?

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 CHOOSE ONE: (LESS or MORE) relevant than it is for an individual investor.

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 (CLIENTELE EFFECT or INFORMATION CONTENT) 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: CHOOSE ONE: A or B: A: the information content effect. or B:the clientele effect.

Answer 1

1.
A:The residual dividend mode

In the residual dividend model firms pay dividends only after all acceptable capital budgeting projects have been financed using retained earnings to the extent possible.

2.
A:It maximizes the firm’s stock price.

Policy should maximize stock price

3.
True

4.
LESS

5.
INFORMATION CONTENT

6.
B: the clientele effect