Which of the following statements is correct?
A)One feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends.
B)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 for this is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities.
C)If a company wants to raise new equity capital steadily over time, a new stock dividend reinvestment plan would make sense. However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.
D)Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities.

Question

Quizplus · Accepted Answer

Dividend reinvestment plans (DRIPs) allow investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date. If a company wants to raise new equity capital steadily over time, a new stock DRIP, where the company issues new shares for the plan, would indeed make sense as it helps the company raise new capital. Conversely, if the firm does not need new equity, then an open market purchase DRIP, where the plan purchases shares on the open market, would be more appropriate as it does not dilute the value of existing shares by issuing new ones. This makes option C correct.

Which of the Following Statements Is Correct