Question

1. Dividend Policy Question

a. Describe the similarity and difference between cash dividend and share repurchasing. [8 Marks]

b. Discuss why stock dividend and stock split are not real dividend issue.

2. Corporate Mergers:

a) Discuss the assumptions and implications of the proposition that value is conserved (neither destroyed nor created) under the addition of income streams (mergers) [6 Marks]

b) Explain the theories of vertical acquisition

c) Summarize the sources of synergy or operating gains from mergers that have been presented in the literature and textbook

Answer 1

1a. Similarities between cash dividend and share repurchasing begins with the point that both cash dividends and share repurchasing by companies leads to the company returning profits to its shareholders. Secondly cash dividend and share repurchasing is usually done by companies that have a substantial amount of cash in its books. It is not undertaken by those companies that are not cash rich.

In terms of differences share repurchasing leads to a decline in the number of shares outstanding in the books of the company. On the other hand dividend payments do not lead to any such declines. Secondly share repurchasing is a more tax efficient way of returning capital to shareholders. This is because, unlike dividends, the investors do not incur any additional tax in case when a company goes for share repurchasing.

1b. Stock dividend and stock split are not real dividend issue. In case of stock dividend while the shareholder gets additional shares the price per share declines. In case of stock split the par value of each share is reduced but the number of shares outstanding increases in proportion. For shareholders, in case of a stock split, the number of shares held by them will increase while par value of shares will fall. Thus in case of stock dividend and stock split there is no gain for the investors and as such they are not real dividend issue for the stockholders.