Question

Explain why a firm might prefer a stock repurchase rather than an increase in the firm's regular dividend.

Answer 1

The stock repurchase refers to the scenatio when the company purchases it's own shares from the market, it is usually done in order to reduce the number of shares outstanding in the market which helps the Earnings of the company to divided among less shareholders thus increasing the earning per share.

When the earning per share of the company goes up the share price tend to move upward which increases the rate of return to the shareholders which is the ultimate motive of the company, so the company need not to pay dividend in order to pay the required rate of return.