Time-Value of Money Concepts
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Utilize the WWW to research, select, and monitor investments. Demonstrate the concept of the time-value of money through the use of examples.
1. Compare a regular cash dividend with a periodic share repurchase. Which has greater appeal to you? Explain.
2. Explain a stock dividend and further explain if you would prefer it to a cash dividend.
3. What are stock splits and how desirable are they?
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Solution Summary
This solution defines the terms of cash dividend, stock dividend and stock splits. It also explains which option is more appealing in terms of earnings per share post repurchase and also how desirable stock splits are in the market.
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Compare a regular cash dividend with a periodic share repurchase. Which has greater appeal to you? Explain.
Periodic share repurchase are becoming now more popular because it is increasing the earnings per share post repurchase. This is because the number of shares outstanding gets reduced and its cost of capital is also reduced. This also increase the ownership percentage of the remaining shareholders. Moreover share repurchase does not attract any dividend taxes.
Moreover once a dividend is put in place, it will be negative if it is decreased or ceased in the future but that is not the case with buyback. THus buyback has more appeal
Explain a stock dividend and further explain if you would prefer it to a cash dividend.
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.
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