Corporate Finance

Correct Answer: Dividends represent a transfer of value from the company to shareholders, but the share price may not necessarily increase by the exact amount of the dividend.

The most accurate statement regarding the impact of a company's dividend policy on its share price is that dividends represent a transfer of value from the company to shareholders, but the share price may not necessarily increase by the exact amount of the dividend. When a company pays a dividend, it distributes a portion of its earnings to shareholders, reducing the company's retained earnings and cash balance. While this transfer of value benefits shareholders, the market may not always react by increasing the share price by the exact amount of the dividend. The other statements are less accurate because: - Dividend payments do not always lead to an immediate and equivalent increase in the company's share price. The market's reaction to dividends depends on various factors, such as the company's overall financial health, growth prospects, and investor sentiment. - The company's share price is not entirely unaffected by dividend payments. While the market may have priced in expected future dividends to some extent, the actual declaration and payment of dividends can still influence the share price, as it provides a tangible return to investors and may signal management's confidence in the company's financial position.

Correct Answer: Repurchasing shares, which reduces the number of outstanding shares and increases EPS by concentrating earnings among fewer shares

Repurchasing shares is the most likely action to increase a company's EPS in the short term. When a company repurchases its own shares, it reduces the total number of outstanding shares. Since EPS is calculated as net income divided by the number of outstanding shares, a reduction in the share count will concentrate the earnings among fewer shares, thereby increasing the EPS value. Increasing the dividend payout ratio will distribute more earnings to shareholders, but it does not affect the number of outstanding shares or the net income, so it will not impact the EPS calculation. Paying a special one-time dividend returns cash to shareholders, but like regular dividends, it does not change the number of shares outstanding or the company's net income. Once the dividend is paid, it will have no further effect on the ongoing EPS calculation.

Correct Answer: To increase the company's total number of outstanding shares

To increase the company's total number of outstanding shares is the least likely motivation for a company to repurchase its own shares. When a company repurchases its own shares, it reduces the total number of outstanding shares. This is because the repurchased shares are effectively retired and no longer considered part of the company's outstanding share count. On the other hand, signaling to the market that management believes the company's shares are undervalued and distributing excess cash to shareholders in a tax-efficient manner are both common motivations for share repurchases. By repurchasing shares when management believes they are undervalued, the company sends a positive signal to the market about its future prospects and can potentially boost the stock price. Repurchasing shares is also a way for companies to distribute excess cash to shareholders in a tax-efficient manner, as it avoids the double taxation that occurs with dividend payments.