Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Chapter 19, Problem 8CQ
Summary Introduction
To determine: The Advantages and Disadvantages of dividend reinvestment plan.
Introduction: A dividend reinvestment plan (DRIP) is a investment procedure in which financial specialists reinvest their cash dividends out the organization through the acquisition of extra stocks on the profit payment date.
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Indicate whether the following statements are true or false. If the statement is false, explainwhy.a. If a firm repurchases its stock in the open market, the shareholders who tender thestock are subject to capital gains taxes.b. If you own 100 shares in a company’s stock and the company’s stock splits two-forone,you will own 200 shares in the company following the split.c. Some dividend reinvestment plans increase the amount of equity capital available tothe firm.d. The Tax Code encourages companies to pay a large percentage of their net income inthe form of dividends.e. If your company has established a clientele of investors who prefer large dividends,the company is unlikely to adopt a residual dividend policy.f. If a firm follows a residual dividend policy, holding all else constant, its dividendpayout will tend to rise whenever the firm’s investment opportunities improve.
Please help solve:
Companies with excess cash often employ share repurchase plans in place of or along with cash dividends. Share repurchase plans can help investors liquidate their holdings by selling their stock to the issuing company and earning from capital gains.
Consider the case of Sixty-second Avenue Company:
Sixty-second Avenue Company has forecasted a net income of $4,800,000 for this year. Its common stock currently trades at $22 per share, and the company currently has 720,000 shares of common stock outstanding. It has sufficient funds available to pay a cash dividend, but many of its investors don't like the additional tax liability to which the dividend income subjects them.
As a result, Sixty-second Avenue’s management is considering making a share repurchase transaction in which it would buy back 85,000 shares of its outstanding shares in the open market by paying the current market share price. Assume that the repurchase transaction will have no effect on either…
6. Stock repurchases
Companies with excess cash often employ share repurchase plans in place of or along with cash dividends. Share repurchase plans can help investors
liquidate their holdings by selling their stock to the issuing company and earning from capital gains.
Consider the case of Gadgetron Inc.:
Gadgetron Inc. expects to earn $5,300,000 this year. The company currently has 830,000 shares outstanding, and the shares have a per-share
market price of $19. Assuming that Gadgetron's price-to-earnings (P/E) ratio remains constant and its earnings are unaffected by a share repurchase
transaction, then the company's expected market price per share-if it repurchases 85,000 shares at the current market price-should be
Which of these factors are considered an advantage of a stock repurchase? Check all that apply.
The firm might pay too high a price for the repurchased stock.
Repurchases can be used to produce large-scale changes in capital structure.
When a firm distributes cash by…
Chapter 19 Solutions
Corporate Finance
Ch. 19 - Dividend Policy Irrelevance How is it possible...Ch. 19 - Stock Repurchases What is the impact of a stock...Ch. 19 - Dividend Policy It is sometimes suggested that...Ch. 19 - Dividend Chronology On Tuesday, December 8,...Ch. 19 - Prob. 5CQCh. 19 - Prob. 6CQCh. 19 - Dividends and Stock Price Last month, Central...Ch. 19 - Prob. 8CQCh. 19 - Dividend Policy For initial public offerings of...Ch. 19 - Investment and Dividends The Phew Charitable Trust...
Ch. 19 - Use the following information to answer the next...Ch. 19 - Stock Repurchases How do you think this tax law...Ch. 19 - Dividends and Stock Value The growing perpetuity...Ch. 19 - Bird-in-the-Hand Argument The bird-in-the-hand...Ch. 19 - Dividends and Income Preference The desire for...Ch. 19 - Dividends and Clientele Cap Henderson owns Neotech...Ch. 19 - Prob. 17CQCh. 19 - Prob. 18CQCh. 19 - Prob. 19CQCh. 19 - Prob. 20CQCh. 19 - Prob. 1MCCh. 19 - Jessica believes that the company should use the...Ch. 19 - Prob. 3MCCh. 19 - Another option discussed by Tom, Jessica, and...Ch. 19 - Prob. 5MCCh. 19 - Does the question of whether the company should...
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