9. Are these two statements correct? Statement 1: Because DDMs do not incorporate the cash flows...

9. Are these two statements correct?
Statement 1: Because DDMs do not incorporate the cash flows to investors from repurchases, they
systematically understate the present value of future cash flows from a stock and underestimate the
true rates of return, which should be based on total cash flows.
Statement 2: Some considerations that might argue against the corporate use of repurchases are their lack
of transparency, potential unequal treatment of sellers and nonsellers, and their lesser ability
(compared to cash dividends) to discipline managers.
A. Both statements are correct.
B. Both statements are incorrect.
C. Only Statement 1 is correct.
D. Only Statement 2 is correct.

10. Are these two statements correct?
Statement 1: A stock with a high P/E ratio might be a growth stock and a stock with a high book-to-
market ratio might be a value stock.
Statement 2: From the net stock anomaly, on average we expect a positive stock reaction to an
announcement that the corporation will issue additional debt.
A. Both statements are correct.
B. Both statements are incorrect.
C. Only Statement 1 is correct.
D. Only Statement 2 is correct.

Expert Solution

jeff jeffy answered 9 months ago

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