Question

You are the CFO of a non-dividend paying firm that currently has excess cash reserves. You are preparing for an internal management meeting where the main item on the agenda is about whether the company should start paying dividends or implement a stock buyback. You have a strong preference for the latter. Write up a memo that outlines your position on this matter and contains your recommendation backed by appropriate justification.

Answer 1

MEMO

DATE: 24.06.2019

TO: Internal Management Team

FROM: Jake Ryan, Chief Financial Officer

SUBJECT: Payment of Dividend or Buyback of Shares

Due to the fact that company is having excessive cash reserves, there has been consistent demand from investors and shareholders, that company shall use the same for the purpose of paying dividend to its shareholders. The company, up till now have not paid any dividend.

There is another option of Buyback of its own stock for the company, after having discussion with financial analysts both within and outside company, Stock Buyback is considered as the desirable option and it would be beneficial for both company as well as shareholders as they will get the desired return by purchases on premium price.

We as a team should decide what is best for the company and its finances along with taking care of financial benefits of shareholders and investors in the longer run.