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1. All else being equal, when the capital gains tax rate is less than an investor's personal marginal tax rate would the individual prefer that the firm issue dividends or allow the share price to appreciate? Why?
2. Based solely on the tax treatment of dividends why might a retired person prefer dividends to capital gains?
3. Explain why the Bird-in-the-Hand explanation of dividend policy is a fallacy.
4. A firm which normally does not not distribute any retained earnings to its shareholders (either via dividends or share buybacks) has found that over time, its industry has become more mature and new growth options are rarer. As a result it has accumulated signficant amounts of cash over the years but now finds fewer uses for these funds and does not expect this to change much in the future. Would you recommend the firm to distribute some of the retained earnings to shareholders? Why or why not.
5. Based on the information signaling argument, why would we expect an increase in dividends to increase the stock price and a decrease in dividends to decrease the stock price?
6. All else being equal, what would a firm's managers likely prefer to do with retained earnings: distribute it to shareholders or keep it within the firm as cash? Why?
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