An oil drilling company has some free cash flow that is not expected to be used for growth or investment projects. The company plans to distribute to its shareholders but is still deciding whether they should conduct a stock repurchase or distribute dividends.
1. Which method of cash distribution carries more informational content when an announcement is made?
a. dividends
b. Stock repurchases
2. Which of these statements is true?
a. taxes on dividends are paid in the year that they are reciveved
b. taxes on dividends are paid when the stock is sold
Consequently, the tax code encourages many individual investors to prefer________.
a. dividends
b. capital gains
3. 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 ______________ explains this phenomenon
a. information content
b. Clientele effect
4. In some cases, analysts noticed that groups of similar investors tend to flock to stocks that have dividend policies consistent with their needs. This circumstance is an illustration of:
a. the clientele effect
b. The information content effect