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a. One disadvantage of dividend reinvestment plans is that they increase
transactions costs for investors who want to increase their ownership in
the company.
b. One advantage of dividend reinvestment plans is that they enable
investors to postpone paying taxes on the dividends credited to their
account.
c. Stock repurchases can be used by a firm that wants to increase its debt
ratio.
d. Stock repurchases make sense if a company expects to have a lot of
profitable new projects to fund over the next few years, provided
investors are aware of these investment opportunities.
e. One advantage of an open market dividend reinvestment plan is that it
provides new equity capital and increases the shares outstanding.
3. Which of the following statements is CORRECT?
a. 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.
b. 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.
c. Stock splits create more administrative problems for investors than
stock dividends, especially determining the tax basis of their shares