Question

a) Companies have several means through which they distribute their dividends with shareholders. If the company chooses to pay dividends in terms of stock repurchase, explain what is stock repurchase and its advantages.

b) What are stock splits and what are the advantages of stock splits?

Answer 1

A) Stock repurchase by company is a method of distribution of the cash back to the shareholders of the company in which company will be generally purchasing the stocks from the existing shareholders at the market price which is higher than current market price so there will be a premium valuation on purchase of the shares from the existing shareholders and it will mean that the company will be returning the money in form of higher and premium valuation for their existing shares and it will be creating valuation for or shareholders and leading to capital gain.

Advantages of share buybacks can be related to-

A) lower cost in comparison to the dividend and becausand dividend are subject to double taxation whereas share repurchases are subject to lower taxations

B) it will also mean that the company is gaining back high amount of control back in its own hands and it will be gaining back control.

C)share buyback tax rate are also lower than the dividend tax rate on the part of the individual.

2) stock split is dividing the share into smaller parts but the overall valuation of the share will remain the same so it will mean that a larger stock will be distributed into smaller stocks like currently the tesla has announced 5 to 1 stock split and Apple has also done the stock split

Advantages of stock split-

A) it will be increasing the total number of shareholders securities as the number of the shareholders securities will be increasing

B) it will also mean that there would be a higher liquidity as larger number of people will be tend to acquire the shares at a lower price

C) there will be higher tradibility of the stocks and company will also have an opportunity of gaining the prices on the upside because stock split is leading into upside in the stock Price.