Which of the following statements is correct?
A) one advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
B) an increase in the stock price when a company decreases its dividend is consistent with signaling theory as postulated by mm.
C) if the "clientele effect" is correct, then for a company whose earnings fluctuate, a policy of paying a constant percentage of net income will probably maximize the stock price.
D) stock repurchases make the most sense at times when a company believes its stock is undervalued.
E) firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above average payout ratios.

Question

Quizplus · Accepted Answer

Stock repurchases make the most sense when a company believes its stock is undervalued because it allows the company to reduce the number of outstanding shares, which can increase earnings per share and ultimately the stock price. The other statements are incorrect. The residual dividend policy may lead to inconsistent dividends and signaling theory postulates that a decrease in dividend signals poor future prospects. The clientele effect suggests that investors prefer consistent dividend payout, irrespective of net income. Finally, firms with good investment opportunities tend to retain more earnings for reinvestment rather than payout as dividends.

Which of the Following Statements Is Correct