In perfect capital markets, how does a share repurchase affect the stock price?
Understand the Problem
The question is asking how a share repurchase impacts the stock price in the context of perfect capital markets, with multiple choice options provided indicating different potential effects.
Answer
In perfect capital markets, a share repurchase does not affect the stock price.
In perfect capital markets, a share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price in these conditions.
Answer for screen readers
In perfect capital markets, a share repurchase has no effect on the stock price, and the stock price is the same as the ex-dividend price in these conditions.
More Information
In perfect capital markets, assumptions such as no taxes, transaction costs, or capital restrictions allow theories like Modigliani-Miller theorem to suggest a share repurchase leaves the stock price unaffected as markets perfectly adjust to such financial maneuvers.
Tips
A common mistake is to assume that share repurchases always increase stock prices, which may be true in realistic markets but not in perfect capital markets.
Sources
AI-generated content may contain errors. Please verify critical information
