Dividend reinvestment plans (DRIPs) allow shareholders to reinvest their dividends in the company by purchasing additional shares instead of receiving cash dividend payments.
The majority of large companies offer dividend reinvestment plans to their stockholders. These plans allow stockholders to automatically reinvest dividends in the stock of the firm paying the dividend. Dividend reinvestment plans can be classified as either old stock or new stock plans.
Globex Corp. plans to use the proceeds from its dividend reinvestment plan to repurchase shares of stock that it had previously issued.
Which type of dividend reinvestment plan does this scenario describe?
a. An old stock dividend reinvestment plan.
b. A ‘new stock’ dividend reinvestment plan.
_____ levels of participation in a dividend reinvestment program suggest that stockholders would be better served if the firm reduced its cash dividends.
Companies decide to start, continue, or terminate their dividend reinvestment plans for their stockholders based on the firms’ need for equity capital. A firm is likely to stop using new stock DRIPs if it _____ equity capital.