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At the annual meeting shareholders voted for reinvesting the company's profit without paying dividents. What are...

At the annual meeting shareholders voted for reinvesting the company's profit without paying dividents. What are the causes/ reasons & expected effects of buying common shares ? Write three causes/reasons and three effects.

Solutions

Expert Solution

The three reasons for buying the stock

· The main reason for buying the stock would the capital gain when the price appreciates in value and investor would gain significantly.

· Normally the dividend is taxed as an ordinary income but capital gain is taxed at lower rates so the price gain would be taxed at lower rate and the after-tax return would be high.

· Companies which does not pay dividend will often give stock dividend to investors and investors benefit when the price rises in future, they will have capital gain as well as dividend gain when the company starts paying dividend in future.

The three effects of the reinvestment

· The main effect of reinvestment is that the growth rate of the company can be expected to increase.

· When the growth rate of the company increases the company share price will also increase and in turn creating capital gain for the investors.

· The reinvestment will actually cause the company overall value to increase and the cost of capital will go down. As the company becomes large, the company creditworthiness in the market usually becomes better and the company is able to raise funds at lower rates.

jeff jeffy answered 8 months ago
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