Which of the following statements is correct?
A)Current Canadian tax law encourages companies to pay dividends rather than retain earnings.
B)If a company uses the residual dividend model to determine its dividend payments, dividend payouts will tend to increase whenever the company's profitable investment opportunities increase.
C)The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the residual dividend model.
D)Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm's financial risk.

Question

Quizplus · Accepted Answer

Large stock repurchases financed by debt can indeed increase a company's earnings per share (EPS) because they reduce the number of outstanding shares. However, financing these repurchases with debt increases the company's leverage, which in turn increases its financial risk.

Which of the Following Statements Is Correct