Explain why the following statement is wrong (1 paragraph maximum): "The main reason why some companies prefer to return cash to shareholders through stock repurchases, rather than dividends, is because repurchases reduce the number of share outstanding and thus tend to increase the stock price."

Explain why the following statement is wrong (1 paragraph maximum): "The main reason why some companies prefer to return cash to shareholders through stock repurchases, rather than dividends, is because repurchases reduce the number of share outstanding and thus tend to increase the stock price."

Financial Accounting Intro Concepts Meth/Uses

14th Edition

ISBN:9781285595047

Author:Weil

Publisher:Weil

Chapter7: Introduction To Financial Statement Analysis

Section: Chapter Questions

Problem 5Q

See similar textbooks

Related questions

Q: Why is the cost of retained earnings cheaper than the cost of issuing new common stock? Group of…

A: Cost of retained earnings is the cost of financing through internal equity, where as cost of issuing…

Q: 2. Which of the following statements is false? Managers are reluctant to make dividend changes that…

A: A dividend is a payment made by a corporation to its shareholders, usually in the form of cash, but…

Q: Which one of the following action will not lead to reducing financial risk? Issuing bonus shares…

A: Financial Risk: The term "financial risk" refers to the inability of your company to effectively…

Q: Why might a company repurchase its own stock? A) It believes that the market undervalues its shares…

A: Introduction: Common stock is owners' capital contributed in the business. Holders of the common…

Q: If a company’s market price rises above the IPO price, does that suggest that the company left money…

A: An initial public offering refers to the new or fresh issue of stock to a group of investors.…

Q: If stock dividends and stock splits don't give shareholders significant value/ amount, why do you…

A: Every publicly listed company has a defined amount of existing shares. A stock split is a measure…

Q: 12. Why might a company repurchase its own stock? A) It believes that the market undervalues its…

A: Solution:- Company may Repurchase its own stock the following reasons as follows under:-

Q: “When the stock market declines the net worth of companies decreases, causing the problem of…

A: Asymmetric information exists in every transaction when one party possesses knowledge that the other…

Q: What is a share buyback? A) An opportunity for the company to increase dividends without sending a…

A: Share Buyback is a share repurchase wherein a company buys back its own shares from the marketplace…

Q: Which of the following is one of the causes of over capitalization? a. Reduction in the market…

A: Over Capitalization means when a company have huge amount of debt in its book and its Net assists…

Q: Which of the following is/are true regarding payout policy to shareholders? A. Most of the time…

Q: True or False Statement 1. A reason that companies tend to favor distributing excess cash as…

A: False. The statement is partially correct, as dividends are often taxed at a lower rate than gains…

Q: Why do companies often repurchase stock instead of paying cash dividends? What is the effect for the…

A: Dividends are the returns that will be paid to the investors who hold the stock of the company. This…

Q: ll of the following are rationales given for a stock dividend or split EXCEPT A. there is…

A: A dividend is a benefit given to shareholders by publicly traded firms, and it is funded by the…

Q: istributed even if the company recorded losses in the last period. c) The balance between curren

A: The right option is C The balance between current dividends and future growth is achieved,…

Q: Which of the following statements is NOT CORRECT? a. The cost of retained earnings is less…

A: The correct option is: b.This statement is not correct because internal equity comprises of retained…

Q: Which of the following statements is NOT true? A. Stock owners benefit from stock price…

A: Stock or Share refers to smallest part in which total capital of entity is divided. Stock has face…

Q: Companies are more apt to choose repurchases over dividends if doing so will enable them to I. take…

A: When a company decides to buy back its own stock from the market, this is known as a share…

Q: Preferred stock may be good for a company because it a. is not as costly as common stock or bonds.…

A: Stocks can be of preferred stock or common stock

Q: Which of the following would not be an appropriate reason for a firm to repurchase its stock: As…

A: In a stock buyback, the issuing business returns the portion of its ownership that was previously…

Q: State whether the following statement is true or false and provide a written explanation of your…

A: Dividend growth model A method that helps the investors to calculate the current price of the stock…

Q: Assume that a company announces an unexpectedly large cash dividend to its shareholders. In an…

A: Dividend policy: The dividend policy of a company is an operation of diverse variables like…

Q: A company might purchase treasury stock for all of the following reasons excepta. it wants to…

Q: To what extent does the company’s dividend policies support or hinder their strategies? For example,…

A: Dividend Policy:A company makes a structure of dividend payout and that structure is known as…

Q: A firm is planning to borrow money to make an equity repurchase to increase its stock price. It is…

A: Equity repurchase is a financial strategy used by companies to buy back their own shares from the…

Q: If the stock market is efficient, why do companies manage their earnings? O To avoid violating debt…

A: The question is multiple choice question. Required Choose the Correct Option.

Q: Explain why the following statement is wrong: “The stock price is equal to the value of equity,…

A: A stock price is the current market price at which shares of a publicly traded company are being…

Q: Which of the following statements about payout policy is FALSE? a. Share repurchases concentrate…

A: Payout Policy refers to the method in which earnings or returns of the shareholder is distributed to…

Q: Companies are far more reluctant to cut dividend than to increase them. Why might this be the case?…

A: Dividends are payouts of a company’s profits to its shareholders as a return on capital invested by…

Q: Which one of the following statements is correct? A Modigliani and Miller argued that dividend…

A: Repurchase of shares are alternative procedure to issue dividend by distribution of wealth in the…

Q: Explain two reasons for the firm management to prefer stock repurch

A: Stock repurchases :- It means purchasing its own shares by the company. It is…

Q: True or False Please answer both. 1. High cash flow is generally associated with a higher share…

A: Statement 1 : High cash flow is generally associated with a higher share price whereas higher risk…

Question

Explain why the following statement is wrong (1 paragraph maximum):

"The main reason why some companies prefer to return cash to shareholders through stock repurchases, rather than dividends, is because repurchases reduce the number of share outstanding and thus tend to increase the stock price."

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

Which of the following statements about payout policy is FALSE? a. Share repurchases concentrate ownership in the hands of the remaining shareholders, making their shares worth more than they were before the repurchase. b. Firms should generally pay out no more than their free cash flow to equity, unless they are in the process of paying out a large cash balance. c. Dividends typically increase at a slower rate than earnings. d. Firms today return more cash to shareholders through repurchases than through dividends. e. Dividends are lower for firms that have higher growth rates.
Which of the following statements is NOT true? A. Stock owners benefit from stock price increases B. Higher stock prices allow companies access to more capital C. Common stocks are not securities D. Stock prices tend to be very volatile
Explain why the following statement is wrong: “The stock price is equal to the value of equity, divided by shares outstanding. Therefore, companies should avoid issuing equity because the number of shares outstanding goes up and thus the stock price would decrease."
Companies are more apt to choose repurchases over dividends if doing so will enable them to I. take advantage of a market undervaluation of their shares. II. maintain or increase the value of executive stock options. III. offset the dilution created by the exercise of executive stock options. IV. distribute revenue increases that are considered temporary or short-term in nature.
2. Which of the following statements is false? Managers are reluctant to make dividend changes that might have to be reversed. Dividends are much less variable than underlying earnings Managers increase dividends only after sustainable increases in earnings Historically, share repurchases have been the main form of payouts. Cash dividends have become increasingly important Share prices react to unexpected increases in dividends
A firm is planning to borrow money to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share. There are no taxes. a. Will earnings per share always increase after such an action? Explain.b. Will the higher earnings per share always translate into a higher stock price? Explain.c. Under what conditions will such a transaction lead to a higher price?
Companies are far more reluctant to cut dividend than to increase them. Why might this be the case? What are the implications for financial markets when firms announce that they will be cutting dividends?
True or FalseStatement 1. A reason that companies tend to favor distributing excess cash as dividends instead of repurchasing stock is that dividends are normally taxed at a lower rate than gains on repurchased stock. Statement 2. Stock repurchases can be used by a firm that wants to increase its financial leverage.
Why might a company repurchase its own stock? A) It believes that the market undervalues its shares B) To offset dilutive effects of employee stock options granted C) To recognize an economic gain when the treasury shares are later sold for a profit D) To improve earnings per share by reducing the denominator E) All of the above is it just A and B or is it all of the above
All of the following are rationales given for a stock dividend or split EXCEPT A. there is positive informational content associated with the announcement. B. the price will not fall proportionately to the share increase. C. conservation of corporate cash. D. an optimum price range does not exist.
State whether the following statement is true or false and provide a written explanation of your answer. “The Dividend Growth Model (a.k.a Gordon Model) is a ridiculous model to use to value a share. Firstly, it assumes that the company will be around forever, whereas we know that lots of companies will eventually disappear because of takeovers and mergers and this model doesn’t allow for that. Secondly, it assumes that dividends grow at the rate of inflation which is not necessarily correct.”
Which of the following is/are true regarding payout policy to shareholders? A. Most of the time that firms announce an increase in dividends, the market reacts negatively, as this is an admission that the firm has few good investment opportunities going forward. B. Large, mature firms should return a lot of cash to shareholders because there aren’t enough good investment opportunities out there for them. C. Flexibility is one key reason why we have seen much more use of share repurchases to return cash to shareholders in the last 3 decades. D. The primary value driver for the firm is how cash is paid out, not cash generation. E. (A) and (B) F. (B) and (C) G. (C) and (D)