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    T/F About Stock and Company Dividend Reinvestment Plans

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    Indicate whether the following statements are true of false. If the statement is false, explain why.

    a. If a firm repurchases its stock in the open market, the shareholders who tender the stock are subject to the capital gains taxes.

    b. If you own 100 shares in a company's stock and the company's stock splits 2-for-1, you will own 200 shares in the company following the split.

    c. Some dividend reinvestment plans increase the amount of equity capital available to the firm.

    d. The Tax Code encourages companies to pay a large percentage of their net income in the 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 dividend payout will tend to rise whenever the firm's investment opportunities improve.

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    Solution Preview

    a. Investors selling stock in the open market have no idea who the buyer is; therefore, the sales are treated like every other sale of stock: capital gains, long or short depending.

    b. True, but at the same cost. Market value will be cut in half.

    c. A dividend reinvestment plan (DRIP) certainly can increase the number of shares outstanding. The company does not pay out cash for your dividend, but give you more stock. If you ...

    Solution Summary

    The solution contains a sentence or two in explanation of each of the T/F questions, including a reference to a residual dividend policy.