Ignoring possible tax effects and signaling costs, the total value of a firm\'s
ID: 2793600 • Letter: I
Question
Ignoring possible tax effects and signaling costs, the total value of a firm's equity remains the same irrespective of how the firm distributes its residual earnings-dividends or stock repurchases. Each distribution method has certain advantages and disadvantages Based on your understanding of dividends and stock repurchases, select the best terms to go with the statements. Select the best term to complete the sentence Undervalued Overvalued Management is likely to repurchase stock if it believes that the stock is ????; this sends positive signals to investors. False True Repurchases are more dependable than dividends because the investor wealth does not decrease after a repurchase, whereas the stock price decreases when dividends are distributed. This statement is ???? Avoid Encourage Management tries to maintain consistent, regular dividend distributions to ???? any dividend cuts in the future and prevent a negative signaling effect. Saves Increases Repurchase transactions allow a firm to buy back stock that may be needed to fulfill obligations when employees exercise their stock options. This ???? the costs associated with issuing new sharesExplanation / Answer
1) Management is likely to repurchase stock if it believes that the stock undervalued as it is positive NPV-investment. Management would want to pay less for repurchase.
2) The given statement is False. Dividends are rather more dependable than repurchases.
3) Management tries to maintain consistent, regular dividend distributions to avoid any dividend cuts in the future and prevent a negative signalling effect,
4) This saves the costs associated with issuing new shares as otherwise, company would have to issue new shares which involves a lot of costs like underwriting fees, legals fees and other expenses.