Which of the following statements is correct?
A) One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
B) An increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by MM.
C) If the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price.
D) Stock repurchases make the most sense at times when a company believes its stock is undervalued.
E) Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.

Question

Quizplus · Accepted Answer

The statement regarding stock repurchases is correct as companies can buy back their own shares when they believe the stock is undervalued, thereby increasing the value for remaining shareholders. The other statements are incorrect. The residual dividend policy may not always lead to a stable dividend payout, an increase in stock price when the dividend is decreased does not align with signaling theory, constant percentage of net income policy may not always maximize stock price, and firms with good investment opportunities tend to reinvest their cash instead of paying high dividends.

Which of the Following Statements Is Correct