Which of the following statements is CORRECT?
A) Historically,the tax code has encouraged companies to pay dividends rather than retain earnings.
B) If a company uses the residual dividend model to determine its dividend payments,dividend payout will tend to increase whenever its profitable investment opportunities increase relatively rapidly.
C) The more a firm's management believes in the clientele effect,the more likely the firm is to adhere strictly to the residual dividend model.
D) Large stock repurchases financed by debt tend to increase expected earnings per share,but they also tend to increase the firm's financial risk.
E) A dollar paid out to repurchase stock has the same tax benefit as a dollar paid out in dividends.Thus,both companies and investors should be indifferent between distributing cash through dividends and stock repurchase programs.

Question

Quizplus · Accepted Answer

Large stock repurchases financed by debt can indeed increase a firm's expected earnings per share because they reduce the number of shares outstanding, potentially increasing the EPS. However, financing these repurchases with debt increases the firm's leverage, which in turn increases its financial risk.

Which of the Following Statements Is CORRECT