(I) Generally, firms engage in stock repurchases during recessions due to low stock prices. (II) During...

(I) Generally, firms engage in stock repurchases during recessions due to low stock prices.

(II) During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends.

Group of answer choices

A) (I) False; (II) True

B) (I) True; (II) False

C) Both are false

D) Both are true

Solutions

Expert Solution

The correct answer is B. The (I) sentence is true and (II) sentence is false as explained below:

(I) Generally, firms engage in stock repurchases during recessions due to low stock prices - During recession, the share prices face huge drop. Also, during recession, generally the business of the firms are also affected negatively which may lead to wound up situation. Therefore, firms engage in stock repurchases during recessions due to low stock prices.

(II) During periods of high growth, it is not unusual for firms to pay out 100% of their earnings to shareholders in the form of dividends - Period of high growth is generally defined as the period where the company makes huge investment and expands its scale of operations. Therefore, need funds for financing the growth. Therefore, it is generally observed that the company in high growth face, tends to lower its dividends to retain the funds for growth financing. Therefore, it is unusual for firms to pay 100% of their earnings to shareholders in the form of dividends.

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