Question

Which of the following statements is correct?a. Capital gains earned in a share repurchase are taxed less favorably than dividends; this explains why companies typically pay dividends and avoid share repurchases.b. Very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.c. Stock repurchases increase the number of outstanding shares.d. The clientele effect is the best explanation for why companies tend to vary their dividend payments from quarter to quarter.e. Modigliani and Miller argue that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the "bird-in-the hand" effect.

Answer 1

Answer:

b. Very often, a company's stock price will rise when it announces that it plans to commence a share repurchase program. Such an announcement could lead to a stock price decline, but this does not normally happen.

Explanation:

Companies issue shares when they are seeking for more funds to run their business. Shares issued become part of the owner equity of the company given out.

When the company wants to reduce its outstanding shares it buys back its shares (repurchase).

When repurchase happens price goes up as this indicates the company is doing well and is not in need of extra funds to run its operations.

The confidence boost increases price.

It is rare for such announcement to cause a fall in share price, unless some negative information of the companie's performance is available.