Question

1.

1. Explain the different types of cash dividend that might be paid by a firm and set out the chronology of dividend payments.
2. Explain the theory of dividend irrelevance as proposed by Modigliani and Miller and analyse why, in reality, this theory may not hold.

c. Explain the nature of a share repurchase and critically discuss why the firm might want to undertake a programme of buying back its own shares.

Answer 1

1.a. Different type of cash dividend paid to investors in form of cash to give a share of profit back to them.

Different types of cash dividend are as follows-

A. Regular cash dividend- These types of cash dividend paid regularly in nature to the shareholders of the firm and it is always expected to remain uniform.

B. Extra cash dividend-this is a type of dividend which is in addition to the the regular cash dividend as company would have made higher amount of profits.

C. Special cash dividend-these type of dividend are paid to the shareholders on a special occasions like mergers and acquisitions or stock splits.

1.B. The theory of dividend irrelevance proposed that dividend payments are irrelevant in nature because they does not add to the value of overall market cap of the company and they are basically the payment from the shares of the company and they would not add any value to to overall market cap.

This theory would not hold true in reality because when a company is distributing dividend it will increase the overall share price as it helps in providing with an idea to the investors that company is generating excess profits and it is also trying to distribute its profits.

1.C. Share repurchase means buying of the equity shares of the company back from the market by the company itself so that it gives with an idea that the shares are undervalued in nature and the company wants to acquire most of IT in order to gain in the long run.

Firm wants to undertake a programme of buying back its stock because it believes that the shares are not adequately valued and there is a possibility of making a higher rate of return through holding those shares in the long run and it wants to accumulate most of it.