Question

What are the possible reasons that share-repurchase is becoming an important payout policy than paying dividends...

  1. What are the possible reasons that share-repurchase is becoming an important payout policy than paying dividends in the recent years?
  2. A junkyard firm recently sold bunch of garbage that was sitting in the warehouse. What would be your payout recommendation to junkyard managers about this one-time positive cashflow?

Homework Answers

Answer #1

As we know,companies can reward their shareholders in two main ways;

i)By paying Dividends

ii)By buy back of shares.

A share buyback refers to the purchase by a company of its shares from the marketplace.The biggest benefit of shares buyback is that it reduces the number of shares outstanding for a company.Shares repurchase usually increases per share measure of profitability like EPS(Earning per share) and cash flow per share and also improve performance measures like return on equity.These improved metrics will generally drive the shares price higher over time,resulting in capital gains for the shareholders.However,these profits will not be taxed until the shareholders sells the shares and realize the gains made on the shareholdings.

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