Question

explain what a share buy-back is and how companies buy back their shares

• discuss the benefits and costs associated with dividend payments, and compare the relative advantages and disadvantages of dividends and share buy-backs

• define bonus share issues and share splits, and explain how they differ from other types of dividends and from share buy-backs

• desribe factors that managers consider when setting the dividend policies for their companies

Answer 1

Question: Explain what a share buy-back is and how companies buy back their shares.

Answer: Share Buyback or share repurchase- When companies buy their already issued shares from the stock market, this process is called Share buyback. When a company thinks that its share is undervalued so to pro

Motive- Motive behind share buyback is to boost the share price. When company's share is not doing well in the stock market from past few months, Investors are not interested to buy that shares of the company then company repurchases its own shares to increase the per share price because when company buys its shares, Number of outstanding shares decreases in the market and per share price increases.

This is done for shareholder's wealth maximization. Company assure the investors that company has enough cash and liquidity.

Question: Discuss the benefits and costs associated with dividend payments, and compare the relative advantages and disadvantages of dividends and share buy-backs.

Answer: Dividend- It is the part of company's profits, distributed to the shareholders.

Benefit of paying dividend for companies- Syable and mature companies pay regular dividend to their shareholders to attract them and to create demand for their shares among the investors.

Cost associated with dividend- Dividend is paid out of the net profit. Company pays cash dividend or also issues shares to pay the dividend.

Benefit of dividend for investors- Investors get a regular income in the form of dividend and they stay invested.

Advantages of dividends- Companies win the trust of investors and investors stay invested in the company that pays regular dividend. Company creates demand for its shares in the market.

Disadvantages of dividends- Company's net profit comes down after paying the dividend and cash also comes down after paying cash dividend.

Advantages of share buyback- It boosts the company's share price and increase wealth of shareholders.

Disadvantages of share buyback- Company's cash comes down when it repurchases shares from the market.

Note: Please post those two remaining questions as other question.