CFA® Level 1: CFA® Level 1

Which statement is most correct?

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Question

Which of the following statements is most correct?

Answers

A. If a firm repurchases its stock in the open market, the shareholders that tender are subject to capital gains taxes.

B. All of the statements are correct.

C. None of these statements are correct.

D. If you own 100 shares in a company's stock, and the company does a 2 for 1 stock split, you will own 200 shares in the company following the split.

E. Some dividend reinvestment plans increase the amount of equity capital available to the firm. B

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Explanations

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A. B. C. D. E.

Explanation

Tendering (selling) shares in the open market is a taxable event. With the stock split, you will own twice the shares but the stock price will be halved. Dividend reinvestment plans permit stockholders to automatically reinvest their dividends in the stock of the paying firm. The new stock type of DRIPs invests the dividends in newly issued stock, hence these plans raise new capital for the firm.

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