Question

1. Discuss the differences between the stock split and stock dividends.
2. Discuss the concept of share repurchases. What are the advantages and disadvantages of share-repurchase?

Answer 1

i) Stock Split : It means reducing face value of share
For Example : A stock of face value of $10 will be divided(Split) into 5 shares of Face value of $2

Stock Dividend : It means that holder of share will be given shares for free i.e Bonus issue. Here Face value of share does not change
For example : Company has decided to issue 1 share as bonus share for every 1 share held by the share holder.

ii) Stock Repurchase: Here company purchases it's own shares from the share holder of the company by paying them premium over market price of shares. By this transaction number of shares outstanding for the company decreases
Advantages:
1)With stock repurchase , No. of shares outstanding will reduce, hence EPS will increase resulting in wealth creation
2)Company decides the price for repurchase of shares, hence high price conveys confidence of promoter in the company
3)Existing Share holders can get exit from the company at good price
Disadvantages:
1) Increase in EPS due to buy back is not organic growth of the company, it is only because of decreased no. of shares. Hence it does not reflect true economic condition of the company
2) Buybacks are done using cash of the company which could otherwise can be use for capacity expansion. Thus this signals that there is no growth for the company in near future and thus can hamper investor's sentiments