The DRK Corporation recently developed a dividend investment plan, or DRIP. The plan allows investors to reinvest cash dividends automatically in DRK in exchange for new shares of stock. Over time, investors in DRK will be able to build their holdings by reinvesting dividends to purchase additional shares of the company. Over 1,000 companies offer dividend reinvestment plans. Most companies with DRIP charge no brokerage or service fees. In fact, the shares of DRK will be purchased at a 10% discount from the market price. A consultant for DRK estimates that 75% of DRK’s shareholders will take part in this plan, which is somewhat higher than the average. a). Evaluate DRK’s dividend investment plan. Will it increase shareholders wealth? Discuss the advantages and disadvantages involved here. b). From a shareholder point
The DRK Corporation recently developed a dividend investment plan, or DRIP. The plan allows investors to reinvest cash dividends automatically in DRK in exchange for new shares of stock. Over time, investors in DRK will be able to build their holdings by reinvesting dividends to purchase additional shares of the company.
Over 1,000 companies offer dividend reinvestment plans. Most companies with DRIP charge no brokerage or service fees. In fact, the shares of DRK will be purchased at a 10% discount from the market price. A consultant for DRK estimates that 75% of DRK’s shareholders will take part in this plan, which is somewhat higher than the average.
a). Evaluate DRK’s dividend investment plan. Will it increase shareholders wealth? Discuss the advantages and disadvantages involved here.
b). From a shareholder point of view, what are the advantages and disadvantages of dividend reinvestment plans? What type of investor is likely to use these, and why?
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