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.
Select the best term to complete the sentence Sell Buy
Repurchases give stockholders a choice to ???? their stock and realize their capital gains or keep their stock and receive future dividends. False True
Repurchases allow a firm to buy back as much stock as it wants, at whatever price it wants, without affecting shareholders. This statement is ???? True False
Dividends provide signals about a firm's future prospects, whereas some investors might misinterpret why a firm is repurchasing stock. This statement is???? Saves Increases
Repurchase transactions allow a firm to buy back stock that may be needed to fulfill obligations when employees exercise their stock options. This ???? the costs associated with issuing new shares.

Answer 1

The Total Value of a Firm's Equity and Distribution Methods:

1. Repurchases give stockholders a choice to sell their stock and realize their capital gains or keep their stock and receive future dividends. False True

2. Repurchases allow a firm to buy back as much stock as it wants, at whatever price it wants, without affecting shareholders. This statement is False.

3. Dividends provide signals about a firm's future prospects, whereas some investors might misinterpret why a firm is repurchasing stock. This statement is True.

4. Repurchase transactions allow a firm to buy back stock that may be needed to fulfill obligations when employees exercise their stock options. This saves the costs associated with issuing new shares.

Step-by-step explanation:

Dividends and stock repurchase are two methods of distributing net earnings by a company. Both methods reduce the equity balance by decreasing the Retained Earnings, which are components of the Stockholders' Equity. Stock repurchase is usually embarked upon by management when it wants to reduce the number of outstanding shares, increase both the demand for the shares and the price, and boast the Earnings Per Share.