Answer Happy

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. Consider the scenario, and answer the questions that follow: Mainway Oil Company is an oil drilling company. The company paid a dividend of $2.80 last year, and in the past its dividend has increased steadily by 4% per year. Mainway just announced that its dividend will increase to $3.75 this year, and its stock price rose from $35 to $38 immediately after the announcement. Which of the following theories best explains why the stock price increased as it did? The dividend irrelevance theory The signaling hypothesis The clientele effect