Which Statement is Most Correct for CFA Level 1 Exam?

D

The new stock type of dividend reinvestment plan invests the dividends in newly issued stock, hence these plans raise new capital for the firm.

Let's go through each statement one by one:

A. If a company undertakes a 3-for-1 stock split, then the number of shares outstanding should fall, and the stock price should rise.

This statement is incorrect. In a stock split, the number of shares outstanding increases, not decreases. In a 3-for-1 stock split, each shareholder receives three shares for every one share they previously held. The total number of shares outstanding increases, but the stock price is adjusted downward proportionally. The value of the shareholder's investment remains the same before and after the stock split. So, the number of shares outstanding should increase, and the stock price per share should decrease.

B. All of these answers are correct.

This statement implies that all the statements in the answer choices are correct, but this cannot be true because some statements are incorrect. Therefore, option B is not the correct answer.

C. None of these answers are correct.

This statement implies that none of the statements in the answer choices are correct. However, at least one of the statements is correct, as we have identified that statement B is incorrect. Therefore, option C is not the correct answer.

D. If a company wants to issue new shares of common stock and also wants to implement a dividend reinvestment plan, then it should implement a new-stock dividend reinvestment plan, rather than an open-market purchase plan.

This statement is correct. If a company wants to issue new shares of common stock and implement a dividend reinvestment plan, it should use a new-stock dividend reinvestment plan. In this plan, the company issues new shares to existing shareholders who choose to reinvest their dividends. This allows shareholders to acquire additional shares without using their own funds, as the dividends are automatically used to purchase new shares at a discounted price. An open-market purchase plan, on the other hand, involves the company using its funds to buy shares in the open market to fulfill the dividend reinvestment. So, the statement is correct.

E. If a company wants to reduce its debt ratio, then it should repurchase some of its common stock.

This statement is not necessarily correct. Repurchasing common stock can be one way for a company to reduce its debt ratio, but it is not the only way. The debt ratio is a measure of a company's total debt relative to its total assets. To reduce the debt ratio, a company can also pay off existing debt, increase its equity through issuing new shares, or increase its assets. So, while repurchasing common stock can be a valid strategy, it is not the only option, and the statement is not universally true.

Therefore, the correct answer is option D: If a company wants to issue new shares of common stock and also wants to implement a dividend reinvestment plan, then it should implement a new-stock dividend reinvestment plan, rather than an open-market purchase plan.