This guide is built for the true / false part, not the full calculation part. It pulls together the main ideas from the three final buckets: options, dividend policy, and mergers & acquisitions.
The best way to use it: learn the big idea first, then the key terms, then the equation meaning, then the common confusion that turns a statement from true to false.
Dividend policy asks whether it matters how cash is distributed. M&M says payout policy is irrelevant only under strict perfect-market assumptions. Real-world frictions such as taxes, signaling, agency issues, and investor preferences explain why payout choice may matter.
In an FCFF-WACC framework, dividends do not directly enter free cash flow to the firm, because dividends are financing cash flows, not operating cash flows. Dividend policy can still matter indirectly if it changes growth, signaling, leverage, or required return.
Under strict assumptions, value depends on investment policy and operating cash flow, not on payout packaging.
Investors can create cash by selling shares if the firm pays less dividend than they want.
Some investors may prefer current dividends to uncertain future capital gains.
Investors may prefer lower dividends and more capital gains if taxes or timing favor capital gains.
Dividend changes may communicate management’s private information about future cash flow.
Fund positive-NPV projects first and pay out only residual cash that remains.
Firm repurchases shares. Often gives more flexibility than committing to a large regular dividend.
Different investors may prefer current income or lower current payout depending on goals and taxes.
In the strict M&M world, payout policy does not change firm value.
Trap: saying dividends are always irrelevant in the real world. The theory is conditional on strict assumptions.
Some investors value current cash more highly than uncertain future capital gains. Stable dividends may therefore support confidence, especially for mature firms with steady cash flow.
If capital gains can be deferred or taxed more favorably, repurchases may look more attractive than higher regular dividends.
Dividend increases may signal confidence in future cash flow. Dividend cuts may send a negative message. That is one reason managers are often cautious about raising regular dividends too quickly.
Fund all positive-NPV projects first. Pay out the residual cash left over. High-growth firms often pay lower dividends; mature firms with fewer high-return projects often pay more.
“M&M proves dividends are irrelevant in every real-world setting.”
“In the M&M setup, investors can create homemade dividends by selling shares.”
“Because dividends go to shareholders, they must directly enter FCFF in enterprise valuation.”
“Repurchases are often more flexible than committing to a permanently higher regular dividend.”
In public-company deals, the bidder can start the process, the target board can negotiate or resist, and other stakeholders can influence the mood. But shareholder voting and tender decisions often matter most. M&A T/F questions often test who has what incentive and what each defense tool actually does.
The board is powerful, but it does not mean the board alone always determines the outcome. Strong offers, tender decisions, shareholder votes, activists, and regulation can all reshape the result.
Bidder offers to buy shares directly from target shareholders, usually at a premium.
Bidder or activist tries to persuade shareholders to elect a new board.
Rights plan that dilutes the bidder if ownership crosses a trigger threshold.
Target repurchases the raider’s shares at a premium so the threat goes away.
Large executive payouts triggered by a change in control and loss of role.
A friendlier alternative bidder with better price, terms, or fit.
Investor who pressures management or the board to change strategy, sell, or negotiate.
Antitrust and other approvals can delay, reshape, or block a deal.
A tender offer is a direct appeal to shareholders, usually above market price.
In a proxy fight, the bidder or activist tries to replace directors and change company direction.
Trap: mixing up a proxy fight with a tender offer. One changes the board; the other buys shares directly.
The poison pill makes a hostile path slower and more expensive by diluting the bidder if a threshold is crossed.
“A proxy fight and a tender offer are the same thing because both buy shares directly from shareholders.”
“A poison pill can make a hostile takeover more expensive and buy the target board time.”
“In every public-company takeover, the target board alone always determines the final result.”
“A white knight may improve the final outcome for target shareholders by offering better price or terms.”