Question

Which of the following statements is NOT correct? Select one: a. After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise. b. Investors can interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued. c. Companies can repurchase shares to distribute large inflows of cash, say from the sale of a division, to stockholders without paying cash dividends. d. Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan. e. Stock repurchases can be used by a firm as part of a plan to change its capital structure.

Answer 1

Answer:

D is not correct statement.

Explanation:

The statement which is not correct is d. the stockholders are required to pay taxes on dividends even if they are to be reinvested. So this statement is not correct and the rest all statements are correct for example, statement a is correct because when there is stock split then the number of outstanding stock will increase where as price per share will fall because there will be more number of stock for 1 stock. Statement b is also correct because usually when there is stock repurchase it signals company management that the stock is undervalued.

Answer 2

Answer: The correct answer is "d. Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.".

Explanation: The statement "d. Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan." is NOT correct because If an investor reinvests their dividends through a dividend reinvestment plan, it is a process in which cash dividends are automatically used to buy shares of the same company and although the investor realizes this and does not receive his dividends he must declare them the same as taxable income.