Distributions to Shareholders Dividends and Share Repurchas

Distributions to Shareholders - Dividends and Share Repurchases Graded Assignment | Read Chapter 14 | Back to Assignment Due Thursday 08.02.18 at 11:45 PM Attempts: Keep the Highest: /6 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. 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 Dividend irrelevance theory O The free cash flow hypothesis O The clientele effect O The signaling hypothesis Consider the case of Red Dirt Producers Inc., and answer the question that follows: Red Dirt Producers Inc. is an oil drilling company. The company paid a dividend of $1.50 last year, and, in the past, its dividend has increased steadily by about 4% a year. Red Dirt just announced that its dividend will increase to $2.10 this year, and its share price rose from $28 per share to $30 per share immediately after the announcement. Which of the following best explains why Red Dirt\'s stock price increased as it did? O The signaling hypothesls O Dividend irrelevance theory O The clientele effect Modigliani and Miller argued that each shareholder can construct his or her own dividend policy. This statement is True O False F10 F11 F12 F8 F9 F7 F3 F4 F5

Solution

As per rules I will answer the first 4 subparts of the question

As per dividend irrelevance theory the investors are not concerned with the dividend history of a company and they are irrelevant in valuation of a company.

As per the free cash flow hypothesis payout dividend is a manner of reducing agency cost of conflict interest between the company managers and shareholders. Company is valued on the basis of FCF of the business.

The clientellel effect explain the movement in companies stock prices as per the demands and goals of investors against a tax, dividend and other changes in policy.

Dividend signalling theory implies that announcement of dividend payout will lead in increasing the share price.

On the basis of the above, the answers are as follows

1)FCF hypothesis

2)Signalling hypothesis

3)True

(M&M argued that shareholders can construct their home-made dividend policy and substitute it for the corporate dividends)

4)Less

(Since they can create their own dividend policy, the company policies are irrelevant. Investors are indifferent to the payments of dividend)