Which of the following statements is most correct?
A) If a company puts in place a 2-for-1 stock split, its stock price should roughly double.
B) Share repurchases are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases.
C) On average, a company's stock price tends to rise when it announces that it is initiating a share repurchase program.
D) Statements a and b are correct.
E) All of the statements above are correct.

Question

Quizplus · Accepted Answer

While statement A may seem logical, a stock split does not in itself change the value of the company or its earnings. The stock price will adjust to reflect the split, but the total value of the investor's holdings will remain the same. Statement B is also incorrect - share repurchases can be more tax-efficient than dividends, as they do not trigger taxes until the investor sells the shares. Statement C is the most correct, as share repurchases can indicate that a company has confidence in its future earnings and may lead to an increase in demand for the stock.

Which of the Following Statements Is Most Correct