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

It is commonly observed that a company's stock price rises when it announces a share repurchase program as this signifies that the company's management believes its stock is undervalued. It is rare for the announcement of a share repurchase program to lead to a decline in stock price, but it can happen in certain circumstances such as when the market is not confident in the company's ability to generate cash flows to fund the program.

The other statements are incorrect. A is false as capital gains earned in a share repurchase are taxed more favorably than dividends. C is false as stock repurchases decrease the number of outstanding shares. D is false as the clientele effect refers to the preference of certain investors for a particular type of dividend policy and does not explain why companies vary their dividend payments. E is false as a 2-for-1 stock split will result in a halving of the stock price.

Which of the Following Statements Is Correct