Which of the following statements is correct?
A) 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.
B) Stock repurchases tend to reduce financial leverage.
C) If a company declares a 2-for-1 stock split, its stock price should roughly double.
D) 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.
E) 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.

Question

Quizplus · Accepted Answer

If a firm repurchases its stock in the open market and shareholders sell their stock for more than they paid for it, they will be subject to capital gains taxes. The other statements are incorrect. An open-market dividend reinvestment plan is attractive to companies that already have common stock outstanding and want to provide an option for shareholders to reinvest dividends to purchase additional shares. Stock repurchases tend to increase financial leverage (not reduce it). A 2-for-1 stock split does not affect the overall value of the company and should not cause a doubling of the stock price. Adopting the residual dividend policy does not necessarily make it easier to meet the requirements of Modigliani and Miller's dividend clientele theory.

Which of the Following Statements Is Correct