Question

Ignoring possible tax effects and signaling costs, the total value of a firm’s equity remains the same irrespective of how the firm distributes its residual earnings—dividends or stock repurchases. Each distribution method has certain advantages and disadvantages.

Based on your understanding of dividends and stock repurchases, select the best terms to go with the statements.

Excess cash or a desire to recapitalize usually leads management to     

Management tries to maintain consistent, regular dividend distributions to encourage any dividend cuts in the future and prevent a negative signaling effect.

True

False

Repurchases are also used to make significant adjustments to a firm’s      ratio.

True or False: Repurchases allow a firm to buy back as much stock as it wants, at whatever price it wants, without affecting shareholders.

True

False

Answer 1

1.
Excess cash or a desire to recapitalize usually leads management to Repurchase stock

2.
Management tries to maintain consistent, regular dividend distributions to encourage any dividend cuts in the future and prevent a negative signaling effect.

False

3.
Repurchases are also used to make significant adjustments to a firm’s debt to equity ratio

4.
Repurchases allow a firm to buy back as much stock as it wants, at whatever price it wants, without affecting shareholders

False