Suppose a Firm Does Not Pay a Dividend but Repurchases

question 33

Multiple Choice

Suppose a firm does not pay a dividend but repurchases shares using $20 million of cash. The market value of the firm decreases by

• A)-$20 million.
• B)0.
• C)$20 million.
• D)cannot say for sure

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Definitions:

Market Risk Premium

The market risk premium is the additional return an investor expects from holding a risky market portfolio instead of risk-free assets.

Risk-Free Rate

The theoretical rate of return on an investment with no risk of financial loss, often represented by government bonds.

Beta

A measure of a stock's volatility in relation to the overall market; a beta greater than 1 indicates higher than market volatility, while a beta less than 1 indicates lower.

Required Rate of Return

A rephrasing of Required Return; the minimum annual percentage earned by an investment that will entice an individual or company to invest money.