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

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Q: All of the following are risks associated with buying stocks, except -- loss of interest payments if…

A: Stocks are based on market demand and supply and it is very volatile and risky.

Q: Which of the following statements is false about the dividend irrelevance proposition of Modigliani…

A: According to Modigliani and Miller, if dividend policy and investment decisions are unrelated, then…

Q: Assumes stock markets are both deep (many buyers and sellers) and liquid (easy to buy or sell). As…

A: Stock market is the marketplace where stocks are bought and sold by traders. The volatility of the…

Q: When additional shares of stock are issued, the earnings per share decreases (assuming no change in…

A: EPS are determined by dividing gains to equity owners by the aggregate number of equity shares…

Q: the firm's CLAIRE: That makes sense. So, what makes this value important to investors is that it is…

Q: An investment bank’s clients wanted to manipulate its stock price in order to facilitate a better…

A: Here Investors bank provides helps to their client to manipulate its stock price to increase the…

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: Most managers try to "smooth" their dividends over time - they try to increase the dividend, but…

A: The dividends is the distribution of surplus profit by a company to its shareholders. It is given as…

Q: In Miller and Modigliani's perfect world, what is likely to happen after a company announces a…

A: Capital structure is the proportion of different financing methods used by the company to fund its…

Q: Which of the following statements is not true?

A: The assets turnover ratio represents the calculation of debt on the basis of the equity of the…

Q: . On the day an IPO comes out, the market pricecan rise above the offering price or fall below…

A: Leaving the money in the table refer to deliberate under-pricing of stocks in initial public…

Q: The Discounted Dividend Model and the Corporate Valuation Model are two different ways to determine…

A: a.The Corporate Valuation Model can be used for companies with uneven cashflow growth rates and the…

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: 3. Which one of the following statements is NOT true? A) Retained profits represent a free source of…

A: The cumulative net income of a corporation held at a certain moment, such as the conclusion of the…

Q: If a company is thinking about distributing excesscash through a stock repurchase program in lieuof…

A: The company chooses to repurchase its shares in the following situation. To reduce outstanding share…

Q: Which of the following statements is FALSE? O A. Public companies typically have access to much…

A: Public companies have large capital raised through public markets, hence statement (A) is true.

Q: Using one of the articles, "Companies borrow and repay debt 'less than' they issue stock, because…

A: Companies typically borrow and repay debt for various reasons, such as financing operations, funding…

Q: A rapid growth firm can often can expect a shift in the type of its typical stockholder as the firm…

A: A consistent rapid growth moves a firm into maturity in later stage. The expected return of a mature…

Q: nvestment bankers argue that "pop" at an IPO is great for the company. "Pop" occurs when the stock…

A: Public Offering Price (POP) means the price of the new stock offered to the public. It is done by…

Q: The bird-in-the-hand argument espousing the importance of dividends or dividend relevance suggests…

A: The bird in hand theory is advocating that investors have a preference of receipt of dividend at…

Q: One drawback of ETFs is that investors: a) are forced to pay higher cost and fee as compared to…

A: ETF(Exchange Traded Funds) is an investment fund which includes stocks, bonds etc. They are traded…

Q: Which of the following is a false statement concerning the market value of a company? All…

A: If the investors are expected ROE is higher then it will lead to greater market value because if ROE…

Q: If we dont have earnings and don't have dividends, how can we figure out what the value of the stock…

A: Determining the value of a stock without earnings or dividends relies on alternative valuation…

Q: Total leverage is a measure of total risk: it measures how earnings per share will change with a…

A: Please Note: As per the guideline, One question shall be answered here as both the question are…

Q: increase will increase the stock price because many investors value stock with a dividend-discount…

A: Dividends are given out of the net income of the company and dividend may be in the form of cash…

Q: All of the following are correct regarding stock dividends except: 1) total stockholders’ equity…

A: A stock dividend is a payment to shareholders that consists of additional shares rather than cash.…

Q: Why do firms still do stock dividends and stock splits if it doesn't give shareholders much value…

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: Regardless of the situation, no well-managed firm would borrow money to pay dividends to…

A: Corporations pay dividends out of the earnings to the shareholders as compensation for the funds…

Q: B. State whether each of the following statements is true or false, and briefly explain why. (i) In…

A: Dividend The part of the profit that is distributed to the shareholders by the company is known as…

Q: True or False: The following statement accurately describes how firms make decisions related to…

A: When company requires funds, it will use retained earnings present in the company. If they are not…

Q: On the average, the announcement of a decrease in dividends can be interpreted by investors as bad…

A: A financial manager has to take three types of decisions for the company. They are investing…

Q: Which of the following is Correct? Cash dividend has no impact on the market value of the company.…

A: Stock also known as equity or shares represents ownership in a corporation. Stock is a type of…

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: Indicate whether its TRUE or FALSE. Then give an explanation. Firms concerned with the sharemarket…

A: Dividends often tend to be sticky in most cases because companies are reluctant to change dividends…

Q: -) Which of the following is NOT a reason companies purchase their own stock as treasury stock? O…

A: Treasury stock, also known as treasury shares or reacquired shares, refers to shares of a company's…

Q: Which of the following is a characteristic of preferred stock? A. Give voting rights to its owner.…

A: This is a statement that is accurate. One way in which preferred stock is comparable to an annuity…

Q: For a large public company, paying cash dividends to shareholders will ____; repurchasing shares…

A: Cash dividend are paid to shareholders that affect the retained earnings and ultimately the total…

Q: What is (are) the test(s) REQUIRED by the NYSE so that companies are eligible to list their shares?…

A: There are various test required for companies to eligible to list their shares

Q: All the above problems are avoided if the company follows the Pecking Order Theory of capital…

A: Pecking Order Theory : It states that the financial manager of the company who takes financing…

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: True or False: The following statement accurately describes how firms make decisions related to…

A: A paragraph is given describing how firm decides to issue new equity. An issuance of equity is…

Q: (a). Large businesses spend millions of dollars annually on insurance. Why? Should they insure…

A: Note: Since you have asked multiple questions, we will solve the first for you. If you want any…

Q: The "Bird in Hand" Dividend Theory implies that Investors always prefer dividends to…

A: Dividend payout decisions involve the payment of dividends and the retention of earnings in the…

Q: Stock dividends are ________ costly to issue than cash dividends. What is the missing word?

A: Cash dividend is exposing company to double taxation. The cash dividend is taxable in the hands of…

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 is true? Group of answer choices a. Dividend payments are attractive to executives who hold many executive stock options that were awarded to them by their firms b.Executives and other insiders benefit most by being able to tender their shares in an open market repurchase since they usually are privy to information that is not available to the general public c.Empirical research suggests that small, retail investors prefer stock repurchases to dividend payments d. a firm does not pay dividends, some institutional investors are prohibited from investing it the firmʹs equity
Explain the following Motives for repurchasing shares: -Signal that the stock is undervalued. -Flexibility of distributing cash without the expectation of cash dividends. -Tax efficiency when the tax rate on capital gains is less than that of cash dividends. Offset share increases from executive stock options.
If the expected rate of return on a stock is less than the required rate of return, The stock is experiencing supernormal growth. The stock should not be bought. The company is probably not trying to maximize its stock price. The stock is a good buy. Dividends are not being declared.
If stock dividends and stock splits don't give shareholders much value, why do you think companies still do this?
Managers of firms may consider a stock repurchase when they believe their stock is ____ by the market, or a offering when they believe their stock is by the market. undervalued; undervalued O overvalued; overvalued O undervalued; overvalued O overvalued; undervalued O none of the above 2255
Is preferred stock more or less risky to investors than debt? Group of answer choices More risky because companies are not required to pay preferred dividend. Less risky because companies are not required to pay preferred dividends. No answer text provided. No answer text provided.
If the Modigliani and Miller hypothesis about dividends is correct, and if one found a group of companies which differed only with respect to dividend policy, which of the following statements would be most correct? Group of answer choices None of these statements is true. All of these statements are true. The total expected return, which in equilibrium is also equal to the required return, would be higher for those companies with lower payout ratios because of the greater risk associated with capital gains versus dividends. If the expected total return of each of the sample companies were divided into a dividend yield and a growth rate, and then a scatter diagram (or regression) analysis were undertaken, then the slope of the regression line (or b in the equation D1/P0 = a + b(g)) would be equal to +1.0. The residual dividend model should not be used, because it is inconsistent with the MM dividend hypothesis.
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.
True or False, pls explain why 1) A stock buyback transaction will increase the number of treasury shares True False
What are some major advantages to cash dividends that simply aren’t available through share repurchases.?
Please explain the rationale why "There is no constant growth in dividends" in your example? Thanks.