1. Dividend policy Aa Aa A firm\'s value depends on its expected free cash flow

Question

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? O The clientele effect O The free cash flow hypothesis O Dividend irrelevance theory O The signaling hypothesis

Explanation / Answer

1.

Option 3

MM dividend irrelevance theory: Firm's dividend policy does not impact firm value/its stock price. If investors want cash, investors can sell shares; and if they don't investors can hold their shares. Hence, firm's value is determined solely by its basic earning power and its business risk

2.

It maximises the firm's stock price. As stock price os dependent on dividends, so optimal diivdend policy would maximise share price

Taxes on dividend income are paid in the year that they are recieved

Capital gains

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.