Question

 

1. What are the advantages of stock repurchases versus paying dividends?

The biggest benefit of repurchases versus paying dividends, is that it reduces the number of shares outstanding for a company. This can improve per-share things like earnings per share and even return on equity. By improving these metrics they can often drive the share prices higher which is good news for the shareholders.  

2. What is the impact of a stock split on the value of a corporation? Why do companies do stock splits?

All publicly traded companies have a given number of shares that are outstanding. In the event of a stock split, those companies are making a decision to increase those number of shares outstanding. In theory, when a stock splits so too does the price. For example if a company had 15 million shares outstanding traded at $1 per share and they split 2:1 they would result in 30 million shares outstanding traded at $0.50 per share. These stock splits are typically found in companies that have seen their share prices increase to levels that are too high compared to their industries stock prices. Often times when a stock splits, the price can increase because it is viewed as more affordable to future investors. It also typically acts as a signal that the stock has been performing well prior to the split, which again can drive new investors to purchase stock.  

3. What is the difference between a stock dividend and a stock split?

Stock dividends are used to benefit the current standing shareholders by providing them additional shares based upon their current holdings. For example if a company were to issue a stock dividend of 0.05 per share, they would be providing current shareholders an additional .05 shares for each share they currently own. This is different from a split, as a stock split is also tied to the price of the stock itself. If you have 1 share that goes to 2 shares, the value of the share is halved in a split scenario.

Answer 1

 

1. What are the advantages of stock repurchases versus paying dividends?

The biggest benefit of repurchases versus paying dividends, is that it reduces the number of shares outstanding for a company. This can improve per-share things like earnings per share and even return on equity. By improving these metrics they can often drive the share prices higher which is good news for the shareholders. Dividends are taxable but repurchases are not.

2. What is the impact of a stock split on the value of a corporation? Why do companies do stock splits?

All publicly traded companies have a given number of shares that are outstanding. In the event of a stock split, those companies are making a decision to increase those number of shares outstanding. When a stock splits to keep the market capitalization constant, the stock price (and par value) must decrease by the split ratio. For example if a company had 15 million shares outstanding traded at $1 per share and they split 2:1 they would result in 30 million shares outstanding traded at $0.50 per share.
These stock splits are typically found in companies that have seen their share prices increase to levels that are too high compared to their industries stock prices, which makes less liquidity and trading difficult. Often times when a stock splits, the price can increase because it is viewed as more affordable to future investors. It also typically acts as a signal that the stock has been performing well prior to the split, which again can drive new investors to purchase stock.

3. What is the difference between a stock dividend and a stock split?

Stock dividends are used to benefit the current standing shareholders by providing them additional shares based upon their current holdings. For example if a company were to issue a stock dividend of 0.05 per share, they would be providing current shareholders an additional .05 shares for each share they currently own. This is different from a split, as a stock split is also tied to the price of the stock itself. If you have 1 share that goes to 2 shares, the value of the share is halved in a split scenario. Also, the par value would remain unchanged in stock dividend but decrease in stock split even though value of investor's portfolio would remain unchanged in both the scenarios.