Question

f. What are stock dividends and stock splits? What are the advantages and disadvantages of stock dividends and stock splits?

g. Whatarestockrepurchases?Discusstheadvantagesanddisadvantagesofafirm’srepurchasingitsown shares.

Answer 1

f. Stock dividend is a method of giving dividends to shareholders in form of extra shares and not in terms of cash.They are not taxes and companies give when they are in short of cash.
Stock splits is a method of increasing shares by splitting existing shares into multiple shares. Example splitting in 2 is to 1 ratio or 3 to 1 ratio
Advantages of Stock Dividend
1. It is not taxed for the investors.
2. Increases ownership of investors without paying cash.
3. It is beneficial for a company with cash crunch.A company with less cash can go for this option to give a better signal to the investors.

Advantages of Stock Splits :
1. It increases liquidity as it increases the number of shares.
2. It helps in reducing higher prices of shares and helps in attracting more investors in it shares.

g. Stock Buyback or repurchase is a method of buying back shares by the company from the equity investors by buying at a fixed price.
Advantages :
1. It helps in reducing the number of shares and reducing ownership.
2. It helps in increasing share price as lower the number of shares higher the prices of share.
3. Companies can increase the value of stocks if they feel it is undervalued by buying back shares.
4. If the company has excess cash it can utilize it buy shares

Disadvantages of share buyback:
1.Even though Earnings per share might increase after buyback the net income might have decreased.. This creates a risk of potential investors.
2. Companies opting for share buyback might not have desired effect on share price if the net income has decreased appreciably. In that case there might be loss of cash for the company.