Which of the following statements is most correct?
A) Companies can repurchase shares either (1) to change their capital structures or (2) to distribute cash to stockholders without paying cash dividends. In the second situation, tax considerations will probably play a key role in the decision to repurchase stock versus to pay more cash dividends.
B) Stock dividends provide investors with additional shares of stock, not cash, yet many investors must pay cash in the form of taxes on the value of the stock dividends. For this reason, stock dividends are rarely used today.
C) The bird-in-the-hand theory of dividend policy could be rejected immediately if personal income taxes were abolished.
D) If the curve relating the WACC and the debt ratio looks like a sharp 'V', this would make it more feasible for a firm to follow the residual dividend policy than if the curve looks like a shallow bowl (or a shallow 'U').
E) The open market type of dividend reinvestment plan is the best type for firms that need to bring in new equity capital.

Question

Quizplus · Accepted Answer

A is the most correct statement as it accurately describes the reasons for companies to repurchase shares and acknowledges the role of tax considerations in such decisions. Option B is incorrect as stock dividends are still commonly used and the tax implications vary depending on the investor's individual tax situation. Option C is incorrect as the bird-in-the-hand theory is based on the preference of investors for current dividends over potential future capital gains, irrespective of tax considerations. Option D is incorrect as the shape of the WACC-debt ratio curve does not impact the feasibility of the residual dividend policy. Option E is incorrect as the type of dividend reinvestment plan that is best suited for a firm depends on multiple factors, including the firm's specific needs and circumstances.

Which of the Following Statements Is Most Correct