Which of the following statements is FALSE?[Fill in the blank]

Question

BlackTom AI · Accepted Answer

We are asked to identify which statement is FALSE among four options about dividends and related concepts.
Option a: 'In a perfect capital market, when a firm repurchases shares, the supply of shares is reduced, and at the same time, the value of the firm’s assets declines.' This statement mixes two ideas. Share repurchases reduce the number of shares outstanding (supply of shares). In a perfect capital market, a repurchase does not necessarily change the total value of the firm’s assets; the effect is typically a reallocation of cash to shareholders and a change in capital structure without changing intrinsic value, so the claim that the firm's assets decline is not correct in the standard theory.
Option b: 'The practice of maintaining relatively constant dividends is called dividend smoothing.' This is a standard definition. Dividend smoothing refers to management’s attempt to keep dividend payments stable over time, even if earnings fluctuate, by using reserves or adjusting payout ratios.
Option c: 'Homemade dividend refers to the process by which an investor, in a perfect capital market, chooses between equity and debt.' This is incorrect. A homemade dividend is an investor’s personal plan to replicate a cash dividend by selling a portion of their holdings to receive cash, not a choice between equity and debt. It’s about cash distribution by selling securities, not capital-structure decisions by the firm.
Option d: 'The idea that dividend changes reflect managers’ views about a firm’s future earnings prospect is called the signalling hypothesis.' This correctly describes a well-known signaling interpretation: changes in dividend policy convey information about expected future earnings.
Thus, after evaluating each option, the statement that is false is option c, because it misstates the concept of a homemade dividend as a firm-level decision about choosing between equity and debt, rather than an investor-level mechanism to create cash via selling shares.

Which of the following statements is FALSE?[Fill in the blank]

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