CHAPTER 26 CHAPTER 26
SHARING FIRM WEALTH: SHARING FIRM WEALTH: DIVIDENDS, SHARE
DIVIDENDS, SHARE REPURCHASESREPURCHASES AND OTHER PAYOUTS
AND OTHER PAYOUTS
S
SUGGESTEDUGGESTED A ANSWERSNSWERS TOTO THETHE R R EVIEWEVIEW Q QUESTIONSUESTIONS ANDAND P PROBLEMSROBLEMS
I.
I. QuestionsQuestions 1
1.. TThhee marginal principle of retained earningsmarginal principle of retained earnings suggests that the suggests that the corporationcorporation must do an analysis of whether the corporation or the shareholders can must do an analysis of whether the corporation or the shareholders can earn the most on funds associated with retained earnings. Thus, we must earn the most on funds associated with retained earnings. Thus, we must consider what the shareholders can earn on other investments.
consider what the shareholders can earn on other investments. 2.
2. ThThe e shshararehehololdder er wowoululd d apappepear ar to to coconnsisideder r didivividedendnds s as as rerelelevavantnt.. Dividends do resolve uncertainty in the minds of investors and provide Dividends do resolve uncertainty in the minds of investors and provide information content. Some shareholders may say that the dividends are information content. Some shareholders may say that the dividends are relevant, but in a different sense. Perhaps they prefer to receive little or relevant, but in a different sense. Perhaps they prefer to receive little or no dividends because of the immediate income tax and higher tax rate no dividends because of the immediate income tax and higher tax rate imposed on cash dividends.
imposed on cash dividends. .
. ThThe e rerelalatitiononshship ip bebetwtweeeen n a a cocompmpanany!y!s s grgrowowth th popossssibibililititieies s anand d ititss dividend policy is that, the greater a company!s growth possibilities, the dividend policy is that, the greater a company!s growth possibilities, the more funds that can be
more funds that can be "ustified for profitable internal reinvestment."ustified for profitable internal reinvestment. #.
#. $an$anageagemenment!t!s desirs desire for contre for control coulol could imply thad imply that a t a clocloselsely held firmy held firm should avoid dividends to minimi%e the need for outside financing. &or a should avoid dividends to minimi%e the need for outside financing. &or a larger firm, management may have to pay dividends in order to maintain larger firm, management may have to pay dividends in order to maintain their current
their current position through 'eeping shareholders happy.position through 'eeping shareholders happy. (.
(. The assThe asset base remaet base remains the same and the sharins the same and the sharehoeholdldersers! pro! proporportiotionatnatee interest is unchanged )everyone got the same new share*. +arnings per interest is unchanged )everyone got the same new share*. +arnings per share will go down by the exact proportion that the number of shares share will go down by the exact proportion that the number of shares inc
increareasesses. . f f the the P-+ ratio P-+ ratio remremainains s conconstastant, the nt, the tototal tal valvalue ue of of eaceachh shareholder!s portfolio will not increase.
shareholder!s portfolio will not increase.
The only circumstances in which a stoc' dividend may be of some The only circumstances in which a stoc' dividend may be of some use
usefulfulnesness s and and perperhaphaps s incincrearease se valvalue ue is is whewhen n divdivideidends nds per per shasharere re
remamain in coconsnstatant nt anand d tototatal l didivividedendnds s go go upup, , or or whwherere e susubsbstatantntiaiall information is provided about
information is provided about a growth company. sta growth company. stoc' split may oc' split may havehave some functionality in placing the company into a lower /stoc' price0 some functionality in placing the company into a lower /stoc' price0 trading range.
.
. cor corpoporatration caion can ma'e a n ma'e a ratrationional casal case for purche for purchasiasing its own eng its own euituityy share as an alternate to
share as an alternate to a cash dividend policya cash dividend policy. +arnings per share will go. +arnings per share will go up and if the P-+ ratio remains the same, the shareholder will receive the up and if the P-+ ratio remains the same, the shareholder will receive the same peso benefit as through a cash dividend. 3ecause the benefits are same peso benefit as through a cash dividend. 3ecause the benefits are inin the format of capital gains, the tax rate will be lower and the tax may be the format of capital gains, the tax rate will be lower and the tax may be deferred until the euity share is sold.
deferred until the euity share is sold.
corporation also may "ustify the repurchase of its own euity share corporation also may "ustify the repurchase of its own euity share because it
because it is at is at a very a very low price, low price, or to or to maintain constant demand maintain constant demand for thefor the shares. 4eacuired shares may be used for employee options or as a part shares. 4eacuired shares may be used for employee options or as a part of a tender offer in
of a tender offer in a merger or acuisition. &irms may also reacuire parta merger or acuisition. &irms may also reacuire part of their euity share
of their euity share as protection against a as protection against a hostile ta'eoverhostile ta'eover.. 5.
5. Dividend Dividend reinvreinvestment estment plansplans alallolow w cocorprpororatatioions ns to to raraisise e fufundndss continually from present shareholders. This reduces the need for some continually from present shareholders. This reduces the need for some external funds. These plans allow shareholders to reinvest dividends at external funds. These plans allow shareholders to reinvest dividends at low costs and to buy fractional shares, neither of which can be easily low costs and to buy fractional shares, neither of which can be easily accomplished in the mar'et by an individual. The strategy of dividend accomplished in the mar'et by an individual. The strategy of dividend reinvestment plans allows for the compounding of dividends and the reinvestment plans allows for the compounding of dividends and the accumulation of ordinary euity share over time.
accumulation of ordinary euity share over time. 6.
6. Dividend policy Dividend policy determines the distribution of a firm!s earnings betweendetermines the distribution of a firm!s earnings between retention and dividend payments to shareholders.
retention and dividend payments to shareholders. 7.
7. The thrThe three ma"oee ma"or argur argumenments favots favorinring the relevg the relevancance of e of divdivideidends arends are8 )1*8 )1* tthe “bird-in-the-hand” theoryhe “bird-in-the-hand” theory , )2, )2** the informational content effect the informational content effect , and, and )*
)* the clientele effect the clientele effect .. 1
199.. TThhee reresidusidual al theotheory ry of of dividividenddendss states that a firm will pay dividendsstates that a firm will pay dividends only if acceptable investment opportunities for these funds are currently only if acceptable investment opportunities for these funds are currently unavailable.
unavailable. 11.
11. :umerous factors influ:umerous factors influence a firm!ence a firm!s choice of dividend ps choice of dividend policyolicy, including, including legal, contractual, and internal constraints; investment opportunities and legal, contractual, and internal constraints; investment opportunities and growth prospects; alternative sources of capital; owner considerations, growth prospects; alternative sources of capital; owner considerations, including their preferences and desire for control; the cost of selling including their preferences and desire for control; the cost of selling euity share; the earnings record; and legal listing.
euity share; the earnings record; and legal listing. 12.
12. $anag$anagers generaers generally prefer a lly prefer a stabstable peso amount of dividendle peso amount of dividends becauses because the
they y belbelievieve e thathat t thithis s polpolicy leads icy leads to to hihighegher r eueuity share ity share priprices ces andand avoids erroneous informational content.
avoids erroneous informational content. 1.
1. 3oth a stoc' dividen3oth a stoc' dividend and a stoc' splid and a stoc' split are ways of distributt are ways of distributing shares toing shares to ordinary euity shareholders. n theory, they do not increase shareholder ordinary euity shareholders. n theory, they do not increase shareholder wealth. <owever, they can convey information to investors. The only wealth. <owever, they can convey information to investors. The only
real difference between a stoc' dividend and a stoc' split is their accounting treatment. &irms may issue stoc' dividends or splits to conserve cash, to supplement cash dividends, and to broaden the ownership base of their euity share.
1#. The decision to repurchase shares may be viewed as an alternative to the payment of a cash dividend. &irms repurchase their own euity share to increase their earnings and mar'et price per share. 4epurchased shares are also used for mergers and acuisitions, stoc' dividends, and euity share option plans. $anagement may repurchase shares because they believe that their shares are currently undervalued.
1(. =orporations may use dividend reinvestment plans to improve shareholder goodwill, to provide mar'et support for their euity share, to broaden their investor base, and to raise new euity capital. Dividend reinvestment plans help shareholders reinvest dividends at minimal costs. 1. The goal of dividend policy is to maximi%e its contribution toward
increasing shareholder wealth.
15. Dividend policy deals with the timing of dividend payments, not the amounts ultimately paid. Dividend policy is irrelevant when the timing of dividend payments doesn!t affect the present value of all future dividends.
16. stoc' repurchase reduces euity while leaving debt unchanged. The debt ratio rises. firm could, if desired, use excess cash to reduce debt instead. This is a capital structure decision.
17. &riday, December 27 is the ex>dividend day. 4emember not to count ?anuary 1 because it is a holiday, and the exchanges are closed. nyone who buys the euity share before December 27 is entitled to the dividend, assuming they do not sell it again before December 27.
29. The change in price is due to the change in dividends, not due to the change in dividend policy. Dividend policy can still be irrelevant without a contradiction.
II. Multiple Choice Questions
1. #. 3 5. =
2. D (. D 6. D
III. Prolems P"o%l!& '
The after>tax dividend is the pretax dividend times one minus the tax rate, so8
fter>tax dividend @ P#.9 )1 A .1(* @ P.71
The euity share price should drop by the after>tax dividend amount, or8
+x>dividend price @ P69.5 A .71 @ P5.#
P"o%l!& #
)a* The shares outstanding increases by 19 percent, so8
:ew shares outstanding @ 9,999 )1.19* @ ,999 :ew shares issued @ ,999
Since the par value of the new shares is P1, the capital surplus per share is P27. The total capital surplus is therefore8
=apital surplus on new shares @ ,999 )P27* @ P65,999
Brdinary euity share )P1 par value* P ,999
=apital surplus 52,999
4etained earnings ((7,169
P7#,169
)b* The shares outstanding increases by 2( percent, so8
:ew shares outstanding @ 9,999 )1.2(* @ 5,(99 :ew shares issued @ 5,(99
Since the par value of the new shares is P1, the capital surplus per share is P27. The total capital surplus is therefore8
=apital surplus on new shares @ 5,(99 )P27* @ P215,(99
Brdinary euity share )P1 par value* P 5,(99
=apital surplus (92,(99
4etained earnings #2#,169
P7#,169
P"o%l!& (
)a* To find the new shares outstanding, we multiply the current shares outstanding times the ratio of new shares to old shares, so8
:ew shares outstanding @ 9,999 )#-1* @ 129,999
The euity accounts are unchanged except the par value of the euity share is changed by the ratio of new shares to old shares, so the new par value is8
:ew par value @ P1 )1-#*
@ P9.2( per share
)b* To find the new shares outstanding, we multiply the current shares outstanding times the ratio of new shares to old shares, so8
:ew shares outstanding @ 9,999 )1-(* @ ,999
The euity accounts are unchanged except the par value of the euity share is changed by the ratio of new shares to old shares, so the new par value is8
:ew par value @ P1 )(-1*
P"o%l!& )
To find the new euity share price, we multiply the current euity share price by the ratio of old shares to new shares, so8
)a* P79 )-(* @ P(#.99 )b* P79 )1-1.1(* @ P56.2 )c* P79 )1-1.#2(* @ P.1 )d* P79 )5-#* @ P1(5.(9
)e* To find the new shares outstanding, we multiply the current shares outstanding times the ratio of new shares to old shares, so8
)a* (9,999 )(-* @ (6, )b* (9,999 )1.1(* @ #92,(99 )c* (9,999 )1.#2(* @ #76,5(9 )d* (9,999 )#-5* @ 299,999 P"o%l!& *
)a* Cet x be the ordinary income tax rate. The individual receives an after>tax dividend of8
fter>tax dividend @ P1,999 )1 A x*
which she invests in Treasury bonds. The Treasury bond will generate after> tax cash flows to the investor of8
fter>tax cash flow from Treasury bonds @ P1,999 )1 A x* 1 E .9)1 A x*F f the firm invests the money, its proceeds are8
&irm proceeds @ P1,999 1 E .9 )1 A .(*F
nd the proceeds to the investor when the firm pays a dividend will be8 Proceeds if firm invests first @ )1 A x* GP1,9991 E .9)1 A .(*FH
To be indifferent, the investor!s proceeds must be the same whether she invests the after>tax dividend or receives the proceeds from the firm!s investment and pays taxes on that amount. To find the rate at which the investor would be indifferent, we can set the two euations eual, and solve for x. Doing so, we find8
P1,999 )1 A x*1 E .9)1 A x*F @ )1 A x*GP1,9991 E .9)1 A .(*FH 1 E .9)1 A x* @ 1 E .9 )1 A .(*
x @ .( or (I
:ote that this argument does not depend upon the length of time the investment is held.
)b* Jes, this is a reasonable answer. She is only indifferent if the after>tax proceeds from the P1,999 investment in identical securities are identical.
That occurs only when the tax rates are identical.
)c* Since both investors will receive the same pre>tax return, you would expect the same answer as in part )a*. Jet, because Koodrose en"oys a tax benefit from investing in euity share )59 percent of income from euity share is exempt from corporate taxes*, the tax rate on ordinary income which induces indifference, is much lower. gain, set the two euations eual and solve for x8
P1,999 )1 A x*1 E .97 )1 A x*F @ )1 A x* )P1,999G1 E .97.59 E )1 A .59* )1 A . (*FH* 1 E .97 )1 A x* @ 1 E .97 .59 E )1 A .59* )1 A .(*F
x @ .19(9 or 19.(9I
)d* t is a compelling argument, but there are legal constraints, which deter firms from investing large sums in euity share of other companies.
P"o%l!& $
ssuming no capital gains tax, the after>tax return for the &J =ompany is the capital gains growth rate, plus the dividend yield times one minus the tax rate. Lsing the constant growth dividend model, we get8
fter>tax return @ g E D )1 A t* @ .1(
Solving for g, we get8
.1( @ g E .9( )1 A .(* g @ .115(
The euivalent pretax return for &J =ompany, which pays no dividend, is8 Pretax return @ g E D
@ .115( E .9( @ .15( or 1.5(I P"o%l!& +
)a* f the company ma'es a dividend payment, we can calculate the wealth of a shareholder as8
Dividend per share @ P7,999-1,999 shares @ P7.99
The euity share price after the dividend payment will be8 PM @ P# A 7
@ P(( per share
The shareholder will have an euity shares worth P(( and a P7 dividend for a total wealth of P#. f the company ma'es a repurchase, the company will repurchase8
Shares repurchased @ P7,999-P# @ 1#9. shares
f the shareholder lets their shares be repurchased, they will have P# in cash. f the shareholder 'eeps their shares, they are still worth P#.
)b* f the company pays dividends, the current +PS is P1.9, and the P-+ ratio is8 P-+ @ P((-P1.9
f the company repurchases euity share, the number of shares will decrease. The total net income is the +PS times the current number of shares outstanding. Dividing net income by the new number of shares outstanding, we find the +PS under the repurchase is8
+PS @ P1.9 )1,999* - )1,999
1#9.* @ P1.(1The euity share price will remain at P# per share, so the P-+ ratio is8 P-+ @ P#-P1.(1
@ #2.1
share repurchase would seem to be the preferred course of action. Bnly those shareholders who wish to sell will do so, giving the shareholder a tax timing option that he or she does not get with a dividend payment.
P"o%l!& ,
Since the P2,999,999 cash is after corporate tax, the full amount will be invested. So, the value of each alternative is8
Alternative 1:
The firm invests in T>bills or in preferred share, and then pays out as special dividend in years.
a. 1. If the firm invests in -!ills8
f the firm invests in T>bills, the after>tax yield of the T>bills will be8 fter>tax corporate yield @ .9( )1 A .(*
@ .92( or .2(I
So, the future value of the corporate investment in T>bills will be8 &N of investment in T>bills @ P2,999,999 )1 E .92(*
Since the future value will be paid to shareholders as a dividend, the after> tax cash flow will be8
fter>tax cash flow to shareholders @ P2,291,#9.1 )1 A .1(* @ P1,651,17(.2
a. ". If the firm invests in preferred share #Assumption: $% percent of dividend taxable&:
f the firm invests in preferred share, the assumption would be that the dividends received will be reinvested in the same preferred share. The preferred share will pay a dividend of8
Preferred dividend @ .96 )P2,999,999* @ P19,999
Since 59 percent of the dividends are excluded from tax8 Taxable preferred dividends @ )1 A .59* )P19,999*
@ P#6,999
nd the taxes the company must pay on the preferred dividends will be8 Taxes on preferred dividends @ .( )P#6,999*
@ P1,699
So, the after>tax dividend for the corporation will be8 fter>tax corporate dividend @ P19,999 A 1,699
@ P1#,299 This means the after>tax corporate dividend yield is8
fter>tax corporate dividend yield @ P1#,299 - P2,999,999 @ .951 or 5.1I
The future value of the company!s investment in preferred share will be8 &N of investment in preferred share @ P2,999,999 )1 E .951*
@ P2,#1,97.#6
Since the future value will be paid to shareholders as a dividend, the after> tax cash flow will be8
fter>tax cash flow to shareholders @ P2,#1,97.#6 )1 A .1(* @ P2,971,72.#
Alternative ":
The firm pays out dividend now, and individuals invest on their own. The after>tax cash received by shareholders now will be8
fter>tax cash received today @ P2,999,999 )1 A .1(* @ P1,599,999
he individuals invest in reasury bills:
f the shareholders invest the current after>tax dividends in Treasury bills, the after>tax individual yield will be8
fter>tax individual yield on T>bills @ .9( )1 A .1* @ .9#( or .#(I
So, the future value of the individual investment in Treasury bills will be8 &N of investment in T>bills @ P1,599,999 )1 E .9#(*
@ P1,662,979.96 he individuals invest in preferred share:
f the individual invests in preferred share, the assumption would be that the dividends received will be reinvested in the same preferred share. The preferred shares will pay a dividend of8
nd the taxes on the preferred dividends will be8 Taxes on preferred dividends @ .1 )P1,999*
@ P#2,19 So, the after>tax preferred dividend will be8
fter>tax preferred dividend @ P1,999 A #2,19 @ P7,6#9
This means the after>tax individual dividend yield is8
fter>tax corporate dividend yield @ P7,6#9 - P1,599,999 @ .9((2 or (.(2I
The future value of the individual investment in preferred share will be8 &N of investment in preferred share @ P1,599,999 )1 E .9((2*
@ P1,775,#(.6#
The after>tax cash flow for the shareholders is maximi%ed when the firm invests the cash in the preferred shares and pays a special dividend later.
P"o%l!&
-)a* The earnings per share were8
)b* The dividends per share were8
+PS= P,999,999 1,(99,999 = P2.99 DPS= = P9.#9 )9.29* )P2.99*
P"o%l!& '
The dividend payout is computed by dividing the yearly dividends per share by the earnings per share.
P"o%l!& ''
To maintain the capital structure, the investment must be funded as follows8 4euired debt )9.9* )P5,999,999* @ P2,199,999
4euired euity )9.#9* )P5,999,999* @ P#,799,999
To provide the P#,799,999 in reuired euity, Olee $ining =ompany must retain the entire P#,999,999 in earnings and issue new euity share for the remaining P799,999. 3y following the current dividend policy, the company will pay no cash dividends.
P"o%l!& '#
)a* The legal limit depends on the law. f the capital impairment provisions of law are limited to the par value of ordinary euity share, the maximum amount of dividends is P2,(99,999, which is the amount of retained earnings )P(99,999* plus capital in excess of par )P2,999,999*. Btherwise, the maximum amount of dividends is the retained earnings of P(99,999. :either amount is realistic because the company would not have the cash available to pay.
)b* n practice, the company!s dividends could not exceed the balance of the retained earnings.
P"o%l!& '(
)a* Kith a stable dividend policy, +lena =ompany will maintain its current P1.(9 cash dividend per share.
Dividend payout ratio =
)#* )P9.2(* P2.(9
)b* Kith constant dividend payout ratio policy, dividends per share will be P1.5(.
P"o%l!& ')
)a* The peso amount transferred from retained earnings is8
)b* total of #9,999 shares )9.29 x 299,999* is added to the ordinary euity share account.
)c* Bf the P1,299,999 transferred from retained earnings, P129,999 )P par x #9,999* is added to the ordinary euity share account, and P1,969,999 )P1,299,999 A P129,999* is added to the capital in excess of par account. The shareholders! euity accounts are as follows8
Brdinary euity share )2#9,999 shares outstanding at P par* P 529,999
=apital in excess of par 2,#69,999
4etained earnings 2,699,999
Total shareholders! euity P,999,999
Dividend payout ratio =
P1,299,999 P,999,999
= 9.#9 or #9I
Dividends last year =
= P1,299,999
)P1.(9* )699,999*
Dividends this year =
= P1,#99,999
)P9.#9* )P,(99,999*
Dividends per share this
year =
P1,#99,999 P699,999
= P1.5(
Peso amount transferred from retained earnings =
= P1,299,999
P"o%l!& '*
Kith a >for>1 stoc' split, the par value declines from P to P1, and the number of outstanding shares triples to 99,999 shares.
Brdinary euity share )99,999 shares outstanding at P1 par* P 99,999
=apital in excess of par 1,#99,999
4etained earnings #,999,999
Total shareholders! euity P,999,999
P"o%l!& '$ P"o%l!& '+ Dividends = = P9 million P19 million A P199 million +arnings A 4etained funds
= Payout ratio = P9 million P19 million = 9.5( or 5.(I = Dividends +arnings Dividends = = P269 million )P699 million* )(I* )+arnings x Payout ratio*
= ddition to retained earnings = = P(29 million P699 million A P269 million +arnings A Dividends =
P"o%l!& ',
Orape =o. is not growing very fast so it does not need cash for growth unless it desires to change its policies. ssuming it does not, Orape =o. should have a high payout ratio.
=herry =orp. is growing very fast and needs its cash for reinvestment in assets. &or this reason, =herry should have a low dividend payout.
P"o%l!& '-)a* Plan )P1.(9 E 1.(9 E 1.(9 E 1.9 E 1.9* @ P5.59 Plan 3 )P.(9 E 2.99 E.29 E #.99 E 1.59* @ P6.#9 )b* Plan Di/i0!n0 P!" Sha"! 1 PVI23'45 PV 1 P1.(9 .797 P1. 2 1.(9 .62 1.2# 1.(9 .5(1 1.1 # 1.9 .6 1.97 ( 1.9 .21 .77
Present Nalue of &uture Dividends P(.61
Plan 3 Di/i0!n0 P!" Sha"! 1 PVI23'#45 PV 1 P .(9 .67 P .#( 2 2.99 .575 1.(7 .29 .512 .1# # #.99 . 2.(# ( 1.59 .(5 .7
Present Nalue of &uture Dividends P(.6
Plan will provide the higher present value of future dividends. P"o%l!& #
nnual dividend @ ).5I* )P#9* @ P2.6 uarterly dividend @ P2.6 - # @ P .5 The euity share should go down by P.5 to P7..
P"o%l!& #'
R!tain
Pa6out
The payout option provides the maximum mar'et value.
ncremental earnings=
= P9,999
)1(I* )P#99,999*
+arnings per share
= P619,999 99,999 = P2.59 = P5(9,999 E P9,999 99,999
Price of euity share
= = P#.29 )1* )P2.59* = )P-+* )+PS* :ew P-+= = 15. )1.19* )1*
+arnings per share
= P2.(9
=
P5(9,999 99,999
Price of euity share
=
= P##.99
)15.* )P2.(9*
P"o%l!& ##
)a* +ight )6* million shares would be outstanding at a par value of P( per share. +verything else will be the same.
)b* Twelve )12* million shares would be outstanding at a par value of P. per share. +verything else will be the same.
)c*
)d*
)e* Probably not. stoc' split should not change the price>earnings ratio unless it is combined with a change in dividends to the shareholders. Oenerally spea'ing, nothing of real value has ta'en place. Bnly to the limited extent that new information content from this split increased investor!s expectations would the stoc' split possibly have an impact on the P-+ ratio.
+PS 3efore = P.(9 +PS = P1#,999,999 #,999,999 +PS fter 2>1 Split = P1.5( +PS = P1#,999,999 6,999,999 +PS fter >1 Split = P1.15 +PS = P1#,999,999 12,999,999
Price after 2>1 Split =
= P(.99
)29* )P1.5(*
Price after >1 Split =
= P2.#9
)29* )P1.15* Price= )P-+* )+PS*
P"o%l!& #( )a* )b* )c* )d* )e*
The euity share price has increased by P#.
Price= )P-+* )+PS* +PS = P( = P(,999,999 1,999,999 = = P(9 )19* )P(* Price
Dividends per share
= P# = P#,999,999 1,999,999 Shares reacuired = 5#,95# = P#,999,999 P(#
Shares outstanding after repurchase = 72(,72 1,999,999 A 5#,95# = +PS = P(.#9 = P(,999,999 72(,72 )P-+* )+PS* = = P(# )19* )P(.#9* Price=
)f* :o. Kith the cash dividend8
$ar'et value per share P(9 =ash dividend per share #
Total value P(#
Kith the repurchase of euity share8
Total value per share P(#
)g* The )potential* appreciation in value associated with an euity share repurchase receives preferential capital gains tax treatment whereas a cash dividend is taxed at the investor!s normal tax rate. The capital gains tax may also be deferred until the euity share is sold.
)h* The corporation may thin' its shares are underpriced in the mar'et. The purchase may stave off further decline and perhaps even trigger a rally. 4eacuired shares may also be used for employee euity share options or as part of a tender offer in a merger or an acuisition. &irms may also reacuire part of their shares as a protective device against being ta'en over as a
