3. Dividends versus stock repurchases Aa Aa Ignoring possible tax effects and si

Question

3. Dividends versus stock repurchases Aa Aa 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 Repurchase stock Distribute dividends Excess cash or a desire to recapitalize usually leads management to ????. 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 ???? Avoid Encourage Management tries to maintain consistent, regular dividend distributions to ???? any dividend cuts in the future and prevent a negative signaling effect. Cash Additional stock Repurchases allow investors who need cash to convert their investment in the company into ????

Explanation / Answer

1) Repurchase stock - this allows the firm to cancel equity and raise capital from new sources

2) False - the exiting shareholders lose the upside and the retaining shareholders gain on it

3) avoid - dividend distribution is a siginificant signal of corporate financial health

4) Cash - this is by definition.

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