Question 1 1. Which of the following statements is correct? Answer [removed] One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their ownership in the company. [removed] One advantage of dividend reinvestment plans is that they enable investors to postpone paying taxes on the dividends credited to their account. [removed] Stock repurchases can be used by a firm that wants to increase its debt ratio. [removed] Stock repurchases make sense if a company expects to have a lot of profitable new projects to fund over the next few years, provided investors are aware of these investment opportunities. [removed] One advantage of an open market dividend reinvestment plan is that it provides new equity capital and increases the shares outstanding. Question 2 1. Which of the following statements is correct? Answer [removed] If a company has a 2-for-1 stock split, its stock price should roughly double. [removed] Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases. [removed] Very often, a company’s stock price will rise when it announces that it plans to commence a share repurchase program.  Such an announcement could lead to a stock price decline, but this does not normally happen. [removed] Stock repurchases increase the number of outstanding shares. [removed] The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter. Question 3 1. Which of the following statements is correct? Answer [removed] If a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes. [removed] An open-market dividend reinvestment plan will be most attractive to companies that need new equity and would otherwise have to issue additional shares of common stock through investment bankers. [removed] Stock repurchases tend to reduce financial leverage. [removed] If a company declares a 2-for-1 stock split, its stock price should roughly double. [removed] One advantage of adopting the residual dividend policy is that this makes it easier for corporations to meet the requirements of Modigliani and Miller’s dividend clientele theory. Question 4 1. Which of the following statements is correct? Answer [removed] Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends. [removed] One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends. [removed] Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced.  The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities. [removed] If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense.  However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense. [removed] Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities. Question 5 1. Which of the following should not influence a firm’s dividend policy decision? Answer [removed] The firm’s ability to accelerate or delay investment projects. [removed] A strong preference by most shareholders for current cash income versus capital gains. [removed] Constraints imposed by the firm’s bond indenture. [removed] The fact that much of the firm’s equipment has been leased rather than bought and owned. [removed] T…

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