Question #30
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 12
Status: Unattempted
Correct Answer: B
Question
Which justification for repurchasing stock is the least valid?
Answer Choices:
A. Repurchases offer shareholders more choices than cash dividends
B. Shareholders prefer capital gains to cash dividends
C. A cash dividend increase, in response to short-term excess cash flows, may confuse investors
Explanation
Some shareholders prefer capital gains, while others prefer dividends. Repurchases offer
shareholders the choice of tendering or not tendering their stock, while cash dividends
represent a payment they cannot refuse. Raising dividends is often seen as a positive
signal, but an increase funded by short-term cash flows may not be sustainable, forcing
the company to reduce the dividend later.