Question

Which of the following statements is correct?

a. Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced. The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities.

b. If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense. However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.

c. Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends.

d. One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends.

e. Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities.

Answer 1

ANSWER: b.

If a company wants to raise new equity capital rather steadily over time, a new stock dividend reinvestment plan would make sense. However, if the firm does not want or need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.

Others are FALSE for the following reasons:

a. Empirical research indicates that, in general, companies send a negative signal to the marketplace when they announce an increase in the dividend, and as a result share prices fall when dividend increases are announced. The reason is that investors interpret the increase as a signal that the firm has relatively few good investment opportunities.

FALSE--as increased dividends are seen as the management's confidence in generating consistent future (positive )cash flows.

c. Under the tax laws as they existed in 2008, a dollar received for repurchased stock must be taxed at the same rate as a dollar received as dividends.

FALSE---If it is company sponsored, & the investor is not given the option, then ,it is not taxable.

d. One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends.

FALSE-- As both are distribution fro the company's profits,dividends reinvested are also taxable.

e. Dividend reinvestment plans have not caught on in most industries, and today about 99% of all companies with DRIPs are utilities.

FALSE-- DRIPs are actually sought after by companies like Honeywell, 3M, etc. & fast catching up-- among investors for its long-run security & commission-free purchase price.