1. Two firms currently have similar cash flows, but their investment opportunities differ. Firm S has limited investment opportunities and firm G has numerous investment opportunities. Which firm would you expect to pay out more to its shareholders this year? Which firm would you expect to have higher payouts in the future? Why?
2. Assume dividends are taxed at the individual income tax rate. Two firms are similar except for their ownership structures. The stock of firm A is owned primarily by large institutions that do not pay taxes. Firm B is owned primarily by individuals. Which firm is likely to pay a larger dividend? Why?