Which statement is correct?
A) Stock repurchases invalidate the dividend discount model
B) Stock repurchases do not add value to a business and can be ignored.
C) When there are repurchases, it is simpler to value a business by discounting the free cash flow.
D) Stock repurchases increase the number of shares and make it difficult to forecast dividends per share

Question

Quizplus · Accepted Answer

When there are repurchases, it is simpler to value a business by discounting the free cash flow. As the number of outstanding shares decreases, the value of each remaining share increases, and this can be accounted for in the calculation of free cash flows. Therefore, it is not correct to say that stock repurchases invalidate the dividend discount model (option A), nor is it correct to say that they do not add value to a business and can be ignored (option B). On the other hand, stock repurchases do not increase the number of shares and make it difficult to forecast dividends per share (option D).

Which Statement Is Correct