Which of the following statements is correct?
A) If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend to increase whenever its profitable investment opportunities increase.
B) The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
C) Companies may pay too high a price in a large open market repurchase if it takes too long to complete.
D) An investor's capital gains from selling stock in a repurchase are always taxed at a higher rate than if the distribution were dividends.
E) The tax code encourages companies to pay dividends rather than reinvest earnings.

Question

Quizplus · Accepted Answer

If a company takes too long to complete a large open market repurchase, the price may increase due to demand or market conditions, resulting in the company paying too high a price. This may mean the company is not using its funds efficiently and may not be maximizing shareholder value. The other statements are incorrect. A) The residual dividend model is based on the idea that dividends are paid from the residual earnings after a company has invested in profitable opportunities. B) The clientele effect refers to the idea that investors prefer certain types of dividends, and a strict version of the residual dividend model may not be preferred by investors who prefer stable dividends. D) Capital gains from selling stock in a repurchase are taxed at the same rates as regular capital gains, which may be lower than the rates for dividends. E) The tax code does not specifically encourage companies to pay dividends over reinvesting earnings, but it does have tax implications for both options.

Which of the Following Statements Is Correct