Question

What are the pros and cons of dividend and stock repurchases. What are the advantages and disadvantages of each type of strategy for maximizing shareholder value. What actions are in the best interests of each of the company, the business managers, and the shareholders? Can the best interests of one group be in conflict with the interests of another group? How?

Answer 1

1)pros and cons of dividend and stock repurchases

A)Stock Repurchase

Pros

Make Use of Excess cash: If there is no postivie NPV projects available Buyback will be a good option to increase value of company

Increase Dividends: After buying back shares number of shares in issue will reduce and effective dividend per share increases.

Boost Share Price: The lesser number of shares in Open market may strenghts share price will benefitial.

Cons

Better alternative Available: It may be management inability to buyback shares rather than reinvesting in high yielding projects.

Sinking Dividend: Using to much money for repurchase and Cutting dividend as a result of lesser cash left.

B)Dividend

Pros

Happy Inestors: Investors who have invested in the company become more happy for having a source of current income.

Signalling Effect: In Stock market some considers paying out dividend as the potential of company,this signal reflect in share price.

2)Maximizing Shareholder Value

stock repurchases

Higher EPS Increase Value: Buying back shares inctease Earning per Share as less shares in issue.This will tends to Increase in company value as potetial investor are willing to pay more.

As A Future Way to Source Capital: If a company brought back shares they may sell it again in stck market when need for money araise instead of taking loans and other source of capital may increase value.

dividend

Signaling Effect: Paying dividend considered as good signal in stock market and will increase share price.

Competitive Advantage: Dividend paid by company may be compared in stock market with those of competitor.

company, the business managers, and the shareholders

It is these parties has different effect as a result of paying dividend and share repurchase offers.

For share holder paying out of dividend offer a current income sometimes it may be the only form of income. And share repurchase offers the a bulk amount if they are willing to selloff shares. There is other case as well.

Company

For a company it may have better opportunities than share repurchase or Paying dividend that is to reinvest in Positive yielding projects to increase alue of company.

Management

Management ability assesment may be affected by spending liquid money on this two instead of making reinvestment they may be offered by Performance related pay for yielding better return.

conflict with the interests And Best Interest

Sharehlder may sometimes prefer to have a dividend payout for getting a current source of income but management may be concered of increasing Company value by reinvesting which offer the a better pay. Here a conflict of interest araises as one party's best interest isnt other party's interest is all about