1. Dividend policy Aa Aa A firm\'s value depends on its expected free cash flow
ID: 2798102 • Letter: 1
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? The clientele effect O The signaling hypothesis 0 The free cash flow hypothesis Dividend irrelevance theory Suppose a firm generates a lot of cash but has limited investment opportunities. Is this stock more likely to be a utility stock or a technology stock? In addition, is the stock more likely to provide a high or low dividend yield? A utility stock that has a high dividend yield A utility stock that has a low dividend yield A technology stock that has a high dividend yield A technology stock that has a low dividend yieldExplanation / Answer
a) Free cash flow hypothesis is based on earnings power and business risk
b) Utility stocks have low investment opportunities and high dividend yield given the high cash generation.
c) Dividend tax is paid when received.
d) investors perfer low or no dividends
e) Theory of dividend preference
f) Clientele effect
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