Which of the following statements is CORRECT?
A) Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases.
B) Very 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.
C) Stock repurchases increase the number of outstanding shares.
D) The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.
E) If a company has a 2-for-1 stock split, its stock price should roughly double.

Question

Quizplus · Accepted Answer

When a company announces a share repurchase program, it often signals to the market that the company believes its stock is undervalued. This can lead to an increase in demand for the stock and a subsequent increase in the stock price. However, there is always a risk that the market will interpret the share repurchase negatively, such as if the company is perceived to be using funds that could have been invested for growth. Therefore, it is not a guarantee that the stock price will rise.

Which of the Following Statements Is CORRECT