CFA Practice Question

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CFA Practice Question

The most important difference between stock repurchases and cash dividend is that they

A. benefit different groups.
B. have different effects on corporate cash flow.
C. have different effects on current stock price.
D. may have different tax consequences.
E. require different accounting practices.
Correct Answer: D

User Contributed Comments 8

User Comment
sarath stock repurchases reduce the tax liability as it increases capital gains..which are not taxed immediately...
danlan2 It is talking about the most important difference, so the answer is D.
proquo 'd anyone consider C?
mysking I DON'T UNDERSTAND!!! Isn't in the text written:
"A share repurchase should be equivalent to the payment of cash dividends of equal amount in their effect on shareholders' wealth, all other things equal (which means the taxation and information content of cash dividends and share repurchases do not differ)."

It is saying there isn't any difference in the treatment of tax between cash dividends and share repurchases??!!

AusPhD The text in brackets is defining what they mean by 'all other things equal'. In reality, all other things are not necessarily equal and tax and signalling differences have tangible effects.
viruss E is also true. cash dividends RE decrease leading to total equity decrease while share repurchase leads to a decrease of RE but a constitution of own equity shares reserve in equity right ?
StJohnDale Would a stock repurchase not increase the stock price, where as a dividend would tend to decrease the stock price once it has been paid? I suppose they talk about current stock price?
johntan1979 Keywords: MOST IMPORTANT difference
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