Question

3. Assume a company wants to return some of its significant cash stockpile to stockholders and has never before paid a dividend. Explain under what circumstances you would choose each of the following options and any negative considerations you may need address: a. Stock Repurchase b. Begin payment of a regular dividend c. Stock split or stock dividend Note: You should consider the value of this question when determining how much effort to put into answering.

Answer 1

Ans a) If company want more control on the company affairs then it will go with the stock repurchase. It boost the faith on the company that the stock price is below its fundamental value which lead to increase in share price and also give more power to the shareholder.

Ans b) If company think there is no more investable opportunity is there and it becomes a mature company which can pay regular dividend then it should take this option. This option is two edge sword since regular payment increase the faith in the company operation but any dividend miss will hamper the growth of company prospect. One need to look into the tax perspective as well because it increases liability on the shareholders.

Ans c) Stock split should occur when company share price is very high and its difficult to trade for smaller retail investor because stock split will increase the liquidity of the share. Stock dividend is same as the dividend only thing is there is not much tax levied in this operation and it increases the liquidity of the share.