Which of the following statements is correct? a. One disadvantage of dividend re

Question

Which of the following statements is correct? a. One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their investment 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

Explanation / Answer

Ans c. Stock repurchases can be used by a firm that wants to increase its debt ratio .

Stock Repurchase reduces the equity component. Thus, Debt ratio increases because debt component remains same but equity component decreases , which leads to increase in Debt ratio.

Debt ratio = Debt / Equity.

When equity decrease, debt ratio increase.

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