Ignoring possible tax effects and signaling costs, the total value of a firm\'s
ID: 2797642 • 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 Sell Buy Repurchases give stockholders a choice to ???? their stock and realize their capital gains or keep their stock and receive future dividends. False True Repurchases allow a firm to buy back as much stock as it wants, at whatever price it wants, without affecting shareholders. This statement is ???? True False Dividends provide signals about a firm's future prospects, whereas some investors might misinterpret why a firm is repurchasing stock. This statement is???? 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 shares.Explanation / Answer
1. Sell - Share repurchase is the re-acquisition by a company of its own stock and represents a more flexible way of returning money to shareholders as compared to paying dividends.
2. False - Repurchase is always more than the current market value of the stock, otherwise shareholders would not come forward to sell their investments.
3. True - Repurchasing a stock might be interpreted that the firm has run out of good ideas or it might just a ploy to boost earnings. .
4. Saves - since the repurchsed stock goes into treasury, it can be used to fulfill obligations when employees exercise their stock options, thus saving money of issuing fresh stocks.