Understanding Dividend Policy Theories at GlobalCorp

Hard Dividends And Repurchases Dividend Policy Theories

GlobalCorp is a publicly traded company with a consistent history of paying dividends. Recently, management has been debating whether to increase the dividend or reinvest earnings back into the business. In this context, understanding the implications of different dividend policy theories is crucial. Consider the following statements regarding dividend policy theories:

1. The **Bird in the Hand** theory suggests investors prefer dividends over future capital gains due to the perceived risk associated with uncertain future cash flows.

2. **Tax Preference** theory posits that shareholders may prefer capital gains over dividends because of favorable tax treatment of capital gains.

3. The **Modigliani-Miller Theorem** asserts that in a perfect market, the dividend policy is irrelevant to the valuation of the firm.

Which of the following statements accurately reflects an aspect of these theories in relation to GlobalCorp’s decision on dividend policy?

Investors may prefer increased dividends due to the Bird in the Hand theory, as they seek certainty in cash flows.

Under Tax Preference theory, shareholders are indifferent to receiving dividends versus capital gains due to equal tax implications.

The Modigliani-Miller Theorem supports the view that increasing dividends will always enhance the company's stock price.

Hint

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