Question #2
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
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Status: Unattempted
Question
Which of the following statements about dividend policy is most accurate?
Answer Choices:
A. A person who believes in the agency cost effect and a proponent of the "bird-in- hand" theory would have opposite views on dividend payout policy
B. A person who believes in bird-in-hand theory would have the same view as one that subscribes to the clientele theory
C. Investors view a stock repurchase as a positive signal and a stock issue as a negative signal
Explanation
Investors view a stock repurchase as a positive signal and a stock issue as a negative
signal. A repurchase may mean that management believes the stock is undervalued.
The other statements are false. A person who believes in the clientele effect and a
proponent of the "bird-in-hand" theory would not have similar views on dividend policy.
Clientele theory argues that different customers have different tax and other concerns
and therefore will gravitate toward companies with payout policies that address those
concerns. Under the agency cost theory, dividends reduce free cash flow that managers
can use for empire building and hence, a high payout is preferred. According to the "bird-
in-hand" theory, investors prefer dividends to capital appreciation because they view the
former (D1 / P0) as less risky than the latter (g, or growth rate). Both approaches have
similar (and not opposite) views on dividend policy.