Which of the Following Statements Is CORRECT

question 25

Multiple Choice

Which of the following statements is CORRECT?

• A) Under the tax laws as they existed in 2007, a dollar received by an individual taxpayer as interest income is taxed at the same rate as a dollar received as dividends.
• B) One nice feature of dividend reinvestment plans (DRIPs) is that they reduce the taxes investors would have to pay if they received cash dividends.
• C) 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 expects fewer good investment opportunities in the future.
• D) If a company needs to raise new equity capital, a new stock dividend reinvestment plan would make sense. However, if the firm does not need new equity, then an open market purchase dividend reinvestment plan would probably make more sense.
• E) Dividend reinvestment plans have not caught on in most industries, and today over 99% of all DRIPs are offered by utilities.

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Definitions:

Nondepository Financial Institution

Institutions that do not accept traditional demand deposits but instead offer financial products such as mutual funds, insurance, and securities.

Insurance Company

A financial institution that provides coverage, compensating financial losses during events like accidents, theft, or natural disasters, in exchange for premiums.

Pension Fund

A type of investment pool established for the purpose of managing and investing collected retirement savings for members.

Common Stocks

Equity securities that represent ownership in a corporation, entitling holders to dividends and, in most cases, voting rights.