1. The DRK Corporation recently developed a dividend reinvestment plan (DRIP). T
ID: 2779638 • Letter: 1
Question
1. The DRK Corporation recently developed a dividend reinvestment plan (DRIP). The plan allows investors to reinvest cash dividends automatically in DRK in exchange for new shares of stock. Over time, investors in DRK will be able to build their holdings by reinvesting dividends to purchase additional shares of the company. Over 1,000 companies offer dividend reinvestment plans. Most companies with DRIPs charge no brokerage or service fees. In fact, the shares of DRK will be purchased at a 10 percent discount from the market price. A consultant for DRK estimates that about 75 percent of DRK's shareholders will take part in this plan. This is somewhat higher than the average. Evaluate DRK's dividend reinvestment plan. Will it increase shareholder wealth? Discuss the advantages and disadvantages involved here.Explanation / Answer
Company should try to maximize shareholder's wealth by distributing dividends and reinvesting some profits for expansion purpose, company can also buyback the shares from market if in case market value of shares comes down.
Advantage- In this question, shareholders are getting 10% discount on the shares.
Disadvantage- Company can issue new shares instead of the above plan as the cost of capital may be lower than the discount given to shareholders.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.