Question Details

Which of the following actions will best enable a company to raise additional equity capital 



 .	Which of the following statements is CORRECT?

a.	Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices.  However, this was determined to be a deceptive practice, and it is illegal today.
b.	Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.
c.	When a company declares a stock split, the price of the stock typically declines—by about 50% after a 2-for-1 split—and this necessarily reduces the total market value of the equity.
d.	If a firm- stock price is quite high relative to most stocks—say $500 per share—then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50.  Moreover, if the price is relatively low—say $2 per share—then it can declare a “reverse split” of say 1-for-25 so as to bring the price up to somewhere around $50 per share.
e.	When firms are deciding on the size of stock splits—say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.

	
 .	Which of the following statements is CORRECT?

a.	An open-market dividend reinvestment plan will be most attractive to companies that need new equity and would otherwise have to issue additional shares of common stock through investment bankers.
b.	Stock repurchases tend to reduce financial leverage.
c.	If a company declares a 2-for-1 stock split, its stock price should roughly double.
d.	One advantage of adopting the residual dividend policy is that this makes it easier for corporations to meet the requirements of Modigliani and Miller- dividend clientele theory.
e.	If a firm repurchases some of its stock in the open market, then shareholders who sell their stock for more than they paid for it will be subject to capital gains taxes.

	
 .	Which of the following actions will best enable a company to raise additional equity capital ?

a.	Declare a stock split. 
b.	Begin an open-market purchase dividend reinvestment plan.
c.	Initiate a stock repurchase program.
d.	Begin a new-stock dividend reinvestment plan.
e.	Refund long-term debt with lower cost short-term debt.

	
 .	Which of the following statements is NOT CORRECT?

a.	After a 3-for-1 stock split, a company- 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- 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.

 

 .	Which of the following statements is CORRECT?

a.	The clientele effect can explain why so many firms change their dividend policies so often.
b.	One advantage of adopting the residual dividend policy is that this policy makes it easier for corporations to develop a specific and well-identified dividend clientele.
c.	New-stock dividend reinvestment plans are similar to stock dividends because they both increase the number of shares outstanding but don’t change the firm- total amount of book equity.
d.	Investors who receive stock dividends must pay taxes on the value of the new shares in the year the stock dividends are received.
e.	If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm- dividend payout.



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