What are some of the reasons for a company preferring stock repurchases to dividends?© BrainMass Inc. brainmass.com October 24, 2018, 9:39 pm ad1c9bdddf
Comparison of regular cash dividend with a periodic share repurchase
As a part of the financing decision the dividend policy of the firm is a residual decision and the dividends are a passive residual. So long firm is able to earn more than the equity capitalization rate than the investors would be content with the firm retaining the earning. In contrast if the firm were able to earn less than the equity capitalization rate investors would prefer to receive the earnings. Firm's Ability to Pay Dividend depends on its funds requirements for growth, ...
The solution compares stock repurchasing and dividends for a company.
Cash Dividends vs Stock Repurchase
Lyle Communications had finally arrived at the point where it had sufficient excess cash flow of $2.4 million to consider paying a dividend. It had 2 million shares outstanding and was considering paying a cash dividend of $1.20 per share. The firm's total earnings were $8 million providing $4.00 in earnings per share. Lyle Communications stock traded in the market at $64.00 per share.
However, Liz Crocker, the chief financial officer, was not sure paying the cash dividend was the best route to go. She had recently read a number of articles in The Wall Street Journal about the advantages of stock repurchases and before she made a recommendation to the CEO and board of directors, she decided to do a number of calculations.
a. What is the firm's P/E ratio?
b. If the firm paid the cash dividend, what would be the firm's dividend yield and dividend payout ratio per share?
c. If a stockholder held 100 shares of stock and received the cash dividend, what would be the total value of his portfolio?
d. Assume instead of paying the cash dividend, the firm used the $2.4 million of excess funds to purchase shares at slightly over the current market value of $64 at a price of $65.20. How many shares could be repurchased?
e. What would the new earnings per share be under the stock repurchase alternative?
f. If the P/E ratio stayed the same under the stock repurchase alternative, what would be the stock value per share? If a stockholder owned 100 shares, what would now be the total value of his portfolio?View Full Posting Details