B. State whether each of the following statements is true or false, and briefly explain why. (i) In perfect capital markets, payout policy is irrelevant. (ii) There are certain types of investors who prefer share repurchases over cash dividends. (iii) Empirical evidence shows that despite higher tax rates on dividends than on capital gains, the number of firms paying cash dividends is higher than the number of firms conducting share repurchases. (iv) Investors generally prefer the imputation tax system over the classical tax system. (v) Firms are generally reluctant to cut cash dividends.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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