Which of the following statements is CORRECT?
A) Under the tax laws as they existed in 2007, a dollar received by an individual taxpayer as interest income is taxed at the same rate as a dollar received as dividends.
B) One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends.
C) Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and, as a result, share prices fall when dividend increases are announced. The reason is that investors interpret the increase as a signal that the firm expects fewer good investment opportunities in the future.
D) If a company needs to raise new equity capital, a new stock dividend reinvestment plan would make sense. However, if the firm does not need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.
E) Dividend reinvestment plans have not caught on in most industries, and today over 99% of all DRIPs are offered by utilities.

Question

Quizplus · Accepted Answer

A new stock dividend reinvestment plan allows a company to issue new shares to investors who reinvest their dividends, thus raising new equity capital. If the company does not need new equity, an open market purchase plan, where dividends are used to buy existing shares, is more appropriate.

Which of the Following Statements Is CORRECT