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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 question that follows: Hackworth Co. is an oil drilling company and 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. Which method of cash distribution carries more informational content when an announcement is made-dividends or stock repurchases? (Hint: of the informational content of a firm increasing or decreasing its dividend relative to a firm announcing a stock repurchase.) Dividends Stock repurchases True or False: Modigliani and Miller argued that each shareholder can construct their own dividend policy. True False Modigliani and Miller also pointed out that many institutional investors do not pay taxes and can buy and sell stocks with very low transaction costs. For these investors, dividend policy is relevant than it is for an individual investor. Another firm called Lootem Power \& Water, an established public utility company, has been paying dividends for the past 20 years. This year, Lootem also announced that it will increase its dividends by 10%. Which class of investors is more likely to be pleased by Lootem's dividend announcement? Investors with high tax rates who don't depend on current dividend income for living expenses Investors with low tax rates who depend on current dividend income for living expenses A firm's dividend policy determines its current clientele of investors