The Advantages and Disadvantages of dividend reinvestment plan. Introduction : A dividend reinvestment plan (DRIP) is a investment procedure in which financial specialists reinvest their cash dividends out the organization through the acquisition of extra stocks on the profit payment date.

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Chapter 19, Problem 8CQ

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To determine: The Advantages and Disadvantages of dividend reinvestment plan.

Introduction: A dividend reinvestment plan (DRIP) is a investment procedure in which financial specialists reinvest their cash dividends out the organization through the acquisition of extra stocks on the profit payment date.

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Indicate whether the following statements are true or false. If the statement is false, explainwhy.a. If a firm repurchases its stock in the open market, the shareholders who tender thestock are subject to capital gains taxes.b. If you own 100 shares in a company’s stock and the company’s stock splits two-forone,you will own 200 shares in the company following the split.c. Some dividend reinvestment plans increase the amount of equity capital available tothe firm.d. The Tax Code encourages companies to pay a large percentage of their net income inthe form of dividends.e. If your company has established a clientele of investors who prefer large dividends,the company is unlikely to adopt a residual dividend policy.f. If a firm follows a residual dividend policy, holding all else constant, its dividendpayout will tend to rise whenever the firm’s investment opportunities improve.

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OPENER-IN-REVIEW In the chapter opener, you learned that with Brookdale Senior Living's stock price trading around $12.35 per share, one of the firm's investors proposed an idea that might net the firm's shareholders $21 per share in cash. Suppose that Brookdale acted upon the suggestion of Land and Buildings and that as a result Brookdale was able to distribute $21 per share in cash to its investors. Suppose that after selling its real estate assets and paying out cash to shareholders, Brookdale's shares were worth $5 per share. Are Brookdale's investors better or worse off? Specifically, calculate the percentage change in the wealth of share- holders (including the cash they received and the change in the value of their stock) that would hypothetically occur if Brookdale acted according to this plan. Now suppose that Brookdale had 185.45 million shares outstanding. What is the total dollar value of wealth created (or destroyed) by the restructuring pro- posed by Land and Buildings?