The correct answer is: C. If the declared dividend is in line with expectations of the investors, there will be no effect on the valuation of the firm.
The rational expectations model of dividend policy is a theory that states that the market value of a firm is not affected by its dividend policy. This is because investors are assumed to have rational expectations, meaning that they have accurate information about the firm’s future prospects and make decisions based on this information. If investors expect a firm to pay a dividend, they will factor this into the price of the firm’s stock. If the firm then pays a dividend that is in line with expectations, there will be no change in the price of the stock.
Option A is incorrect because it states that there will be no effect of dividend policy on the valuation of the firm, regardless of whether investors have rational expectations. This is not necessarily the case, as investors may not always have accurate information about the firm’s future prospects.
Option B is incorrect because it states that investors will value a dividend paying firm higher than a non-dividend paying firm. This is not necessarily the case, as investors will only value a dividend paying firm higher if they expect the dividend to be sustainable in the long run.
Option D is incorrect because it states that the change in the firm’s value will be minimal if the declared dividend is in accordance with expectations. This is not necessarily the case, as the change in the firm’s value will depend on the size of the dividend and the market’s reaction to it.