Which of the following statements is CORRECT?
A) If a company has a 2-for-1 stock split, its stock price should roughly double.
B) Capital gains earned on shares repurchased are taxed less favorably than dividends, which is why companies typically pay dividends and avoid share repurchases.
C) often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.
D) Stock repurchases increase the number of outstanding shares.
E) The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter. Answer: c is correct, but perhaps the easiest way to answer this question is to eliminate the other choices, which are obviously wrong.

Question

Quizplus · Accepted Answer

This statement is correct as it is commonly observed that a company's stock price rises when it announces a share repurchase program. The other options are either incorrect or incomplete. A) is incorrect as a stock split does not change the overall value of the company. B) is incomplete as it does not mention the tax rate on capital gains vs. dividends. D) is incorrect as stock repurchases actually reduce the number of outstanding shares. E) is incorrect as the clientele effect refers to the preference of certain investors for high or low dividend-paying stocks, but does not explain why companies vary their dividend payments.

Which of the Following Statements Is CORRECT