Question

. Briefly discuss the options a firm has to provide a payout to shareholders. Explain the benefits

associated with each option and provide an example of what type of firm might choose this option

Answer 1

For paying out to shareholders, there are 2 options:

1) Dividend: These are part of the profits paid to the shareholders. It may be subject to taxation at the corporate and/or personal level depending on the country. In some cases, it may not be very tax efficient to do this. Firms that do not have great growth opportunities may offer regular dividend so that the dividend yield is attractive to risk averse investors.

2) Share repurchase or buyback: If the share price is quite low (with respect to intrinsic value as determined by the Management), they may offer to buy back a portion of the investors share so as to reduce equity capital of the firm. The Earnings per share may become accretive based on the repurchase price offered. In many countries, the share repurchase is more tax efficient than dividend.