Which of the following statements is correct?
A) A key advantage of the residual dividend policy is that it usually results in a stable dividend policy which is attractive to investors.
B) Investors should prefer that a corporation repurchase its common stock when the stock is overpriced.
C) A reduction in the capital gains rate should work to discourage corporations from repurchasing their shares.
D) The theory that investors prefer dividends rather than capital gains suggests that firms that increase their dividend payout should expect to realize a higher share price and a lower cost of equity capital.
E) Answers c and d are both correct.

Question

Quizplus · Accepted Answer

The correct statement is that the theory that investors prefer dividends rather than capital gains suggests that firms that increase their dividend payout should expect to realize a higher share price and a lower cost of equity capital. This is because investors see high-dividend-paying stocks as less risky and more stable, thus increasing demand and driving up share price, while also reducing the cost of equity capital. Option A is incorrect because the residual dividend policy is not always stable and can fluctuate widely depending on the corporation's earnings. Option B is incorrect because investors should prefer a corporation to repurchase its common stock when the stock is underpriced, not overpriced. Option C is incorrect because a reduction in the capital gains rate would make repurchasing shares more attractive since capital gains would become more valuable.

Which of the Following Statements Is Correct