Question

1. What are the possible reasons that share-repurchase is becoming an important payout policy than paying dividends in the recent years?

Answer 1

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Due to the following benefits share repurchase is becoming popular:

1. Share repurchases are done at a higher price then it's the market price, hence driving up the stock price. It's good for investors. It gives a boost to share price.

The reason for a higher price is that Management believes that share price is undervalued.

2. It shows that the company has enough cash reserve for its future commitments and projects. Company has belief in itself.

3. Tax benefit: normally share buyback is taxed at the capital gain tax rate. Which is lower than the ordinary Income tax rate.

4. Share repurchase shows an overall improvement in shareholders value. Because as no.of shares are reduced then earnings per share increases.