Question

In a leadership role in a public corporation it is important to have a clear understanding of total shareholder returns and how changes in corporate policy can impact the existing shareholder base of the firm.

Discuss each of the following corporate actions from the perspective of the existing shareholders to assess the potential market implications of these actions:

• Issuance of additional shares of common stock.
• Announcement of a new share repurchase program.
• Increase of the quarterly dividend per share.

Answer 1

1: issuance of additional shares implies that the earnings per share reduces. It also implies that the cost of capital of the company increases. Due to this the share price generally declines.

2: announcement of a new share repurchase program implies that the number of shares outstanding would decline. Due to this the earnings per share will increase and this will have positive effect on the share price.

3 : increase in the quarterly dividend will have a positive impact on the share price because the share price is calculated as the present value of future dividends under the dividend discount model.