Cash dividends send which two of the following signals to the market?
I.Agency costs will be lowered since less cash will be held by the firm.
II.The firm is planning on downsizing.
III.The firm is currently,and expects to continue to be,profitable.
IV.The firm will no longer conduct stock repurchases.

Question

Quizplus · Accepted Answer

Cash dividends signal that the firm is profitable and expects to continue being profitable (signal III), and also that the firm will no longer conduct stock repurchases (signal IV). It does not signal that the firm is planning on downsizing (signal II), and while it may lower agency costs, this is not a primary signal sent by cash dividends (signal I).

Cash Dividends Send Which Two of the Following Signals to the Market