Question

Which of the following statements is NOT CORRECT?

1. Stock repurchases can be used by a firm as part of a plan to change its capital structure.
2. After a 3-for-1 stock split, a company's price per share should fall, but the number of shares outstanding will rise.
3. Investors may interpret a stock repurchase program as a signal that the firm's managers believe the stock is undervalued, or, alternatively, as a signal that the firm does not have many good investment opportunities.
4. A company can repurchase stock to distribute a large one-time cash inflow, say from the sale of a division, to stockholders without having to increase its regular dividend.
5. Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.

Answer 1

The dividend reinvestment plan is a plan which will reinvest the dividend of investors in the company and it will increase the rate of return of investor in the long run so that dividend reinvestment plan is considered taxable in nature because it will be considered as a distribution of dividend to the shareholders of company which was later reinvested into the company itself, so it is taxable and it is not exempt.

All the other statements are true because stock repurchase is used as providing a signal to the market and stock split will reduce the price of share and increase the total outstanding number of shares in the market.

Correct answer is option (E).