Asked by Jerry Simmons on May 11, 2024
Verified
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.
Canadian Tax Law
Canadian tax law is the legal framework governing the collection of taxes in Canada, including both federal and provincial taxes.
Residual Dividend Model
A strategy for determining dividend payments based on the residual or leftover earnings after all operational and expansion costs have been met.
Clientele Effect
A theory suggesting that changes in dividend policy will attract different types of investors based on their personal preferences for dividend payouts.
- Pinpoint the determinants of stock repurchases and analyze their influence on the perception of the market and the structure of capital.
- Comprehend the essential concepts and effects of theories related to dividend policy, including the signaling theory and the clientele effect.
Verified Answer
KA
Kishen AnathamMay 15, 2024
Final Answer :
D
Explanation :
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.
Learning Objectives
- Pinpoint the determinants of stock repurchases and analyze their influence on the perception of the market and the structure of capital.
- Comprehend the essential concepts and effects of theories related to dividend policy, including the signaling theory and the clientele effect.