A Firm Has $250,000 to Spend on Either a One-Time

question 18

Multiple Choice

A firm has $250,000 to spend on either a one-time special dividend or on a share repurchase program.If the share repurchase is selected,then the firm's:

• A) value will decrease just as if the dividend option had been selected.
• B) balance sheet will be unaffected and the share price will remain constant.
• C) equity balance will be reduced by less than it would have been under the dividend option.
• D) shareholders will receive less value than under the dividend option.

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Definitions:

Transaction Costs

Expenses incurred when buying or selling a good or service, which may include broker fees, commissions, and other charges.

PE Ratio

The price-to-earnings ratio, a valuation metric that compares a company's stock price to its earnings per share.

Stock Repurchase

A company's buying back of its own shares from the marketplace, which can reduce the number of outstanding shares and potentially increase the stock value.

Stock Dividend

A payment made by a corporation to its shareholders in the form of additional shares, rather than cash.