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    Stock repurchase versus cash dividend

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    Hello, i am trying to figure this problem out. However, one of my classmates presented a vague anwser, please add to it or fix it for us.

    10. Is repurchasing stock a good alternative to cash dividends (a) on a regular basis and (b) under special conditions? (Note: No large, publicly owned company has ever been challenged by tax authorities on its repurchase program, and no challenge is likely to occur.)

    Vague anwser:

    a stock repurchase means the shareholder gets one FINAL distribution of cash versus dividends which is an INCOME STREAM into the future. After a stock repurchase, the company owns the stock and the shareholder is not entitled to any more. Also, the question whether repurchasing stock on a regular basis is not answered. I would say NO because regular repurchasing uses up cash that should go into operations and investing activities (the reasons the company exists), and this also would keep shrinking the pool of shareholders available who are the source of equity financing.

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    Solution Preview

    Whether the firm repurchases stock or gives dividends, in both cases it is using up cash.

    If firm repurchases on a regular basis, the benefit that the shareholder gets is that repurchase is usually at a price higher than the curent market price and hence benefits the shareholders who exit, it also benefits the shareholders who continue since the EPS may go up in the future and lesser liquidity may drive up the market price. Once it is on a regular basis, then the shareholders already know about it and hence ...

    Solution Summary

    The solution explains the difference between stock repurchase and cash dividends