Which of the following statements is most correct?
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A. B. C. D. E.E
These are all correct.
Let's analyze each statement to determine which one is most correct:
A. Investors can interpret a stock repurchase by a firm as a signal that the firm's managers believe the stock is underpriced. This statement is generally correct. When a company repurchases its own stock, it can signal to investors that the management believes the stock is undervalued. By repurchasing shares, the company effectively reduces the number of shares available in the market, which can increase the earnings per share (EPS) and potentially enhance shareholder value. Investors often interpret stock repurchases as a positive signal about the company's financial health and prospects.
B. None of these statements are correct. This option states that none of the statements provided are correct. Since we have identified at least one correct statement (Statement A), we can conclude that this option is incorrect.
C. After a 3-for-1 stock split, a company's price per share will fall and its number of shares outstanding will rise. This statement is correct. In a stock split, the company increases the number of shares outstanding while proportionally decreasing the price per share. In a 3-for-1 stock split, for every existing share, the company issues an additional two shares. As a result, the total number of shares outstanding will increase, while the price per share will decrease. The split does not impact the company's market capitalization or the proportional ownership of existing shareholders.
D. Stock repurchases can be used by firms to defend against hostile takeovers since they increase the proportion of debt in a firm's capital structure. This statement is incorrect. Stock repurchases do not directly increase the proportion of debt in a firm's capital structure. Stock repurchases are typically funded from retained earnings or available cash, not debt issuance. However, stock repurchases can indirectly affect a firm's capital structure by reducing the equity base and potentially increasing the debt-to-equity ratio. This change in capital structure could make a hostile takeover more expensive or less attractive to potential acquirers, but it is not a direct result of stock repurchases.
E. All of these statements are correct. This option states that all of the statements are correct. However, as discussed above, Statement D is incorrect. Therefore, we can conclude that this option is also incorrect.
In summary, the most correct statement among the given options is:
A. Investors can interpret a stock repurchase by a firm as a signal that the firm's managers believe the stock is underpriced.