Asked by Prince Osman on May 01, 2024
Verified
Which of the following statements is correct?
A) Firms with a lot of good investment opportunities and a relatively small amount of cash tend to have above-average payout ratios.
B) One advantage of the residual dividend policy is that it leads to a stable dividend payout, which investors like.
C) An increase in the stock price when a company decreases its dividend is consistent with signalling theory as postulated by MM.
D) Stock repurchases make the most sense at times when a company believes its stock is undervalued.
Signalling Theory
A concept in economics and finance suggesting that one party credibly conveys some information about itself to another party.
Residual Dividend Policy
A strategy where a company pays dividends out of the residual or leftover equity once all project capital requirements are met.
Payout Ratios
The percentage of a company's earnings distributed to its shareholders in the form of dividends, relative to its total earnings.
- Grasp the principles and implications of dividend policy theories, including signaling theory and clientele effect.
- Identify factors influencing stock repurchases and their impact on market perception and capital structure.
Verified Answer
JV
Jennifer ValdezMay 07, 2024
Final Answer :
D
Explanation :
Stock repurchases make the most sense when a company believes its stock is undervalued because repurchasing shares reduces the number of outstanding shares and increases earnings per share, which can lead to an increase in the stock price. A, B, and C are not correct statements.
Learning Objectives
- Grasp the principles and implications of dividend policy theories, including signaling theory and clientele effect.
- Identify factors influencing stock repurchases and their impact on market perception and capital structure.