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 because a repurchase announcement usually is seen as a positive signal from management.
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

Share repurchase program announcements are generally considered as positive signals from management, which leads to an increase in the company's stock price. Capital gains earned through share repurchase have the same tax treatment as dividends; hence, companies do not avoid share repurchases due to unfavorable tax treatment. The total number of outstanding shares decreases as a result of a share repurchase, not increase. The clientele effect explains why companies have stable dividend policies with a preference for either high or low dividend payments. In a 2-for-1 stock split, the number of outstanding shares will double, but the stock price will be halved.

Which of the Following Statements Is Correct