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 send signals that the firm is currently profitable and expects to continue to be profitable in the future (III), as cash dividends are typically only paid out by profitable companies. Additionally, paying out cash dividends lowers the amount of cash held by the company, which signals that agency costs will be lowered (I). However, cash dividends do not signal that the firm is planning on downsizing (II) or that it will no longer conduct stock repurchases (IV).

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