Capital Market In a “perfect world”
Dividend payments can be crucial for a company to demonstrate its stability and profitability. Dividend payments rather than share repurchases demonstrate that the business is expanding and profitable enough to have a promising future. Dividends are regularly paid to stockholders by well-established companies. A significant boost in shareholder returns may result from combining dividend payments with share repurchases.
Because the taxes are paid later, when the shares are sold, there would be a tax advantage for share repurchasing. Every time a dividend payment is issued, taxes are due. In some cases, dividend taxes can be preferable. Managers may employ purchasing back depending on the number of shares the company owns. “Reducing a company’s outstanding share count is the main advantage of a share buyback. This typically boosts performance metrics like return on equity and per-share profitability indicators like earnings-per-share (EPS) and cash-flow-per-share. The share price will typically increase over time due to these better measures, giving owners capital benefits. 2019 (Picardo). When the stockholders sell their shares, the earnings will be taxed. If the shares were inexpensive, a manager might be tempted to buy them back. If a stock were overvalued, a manager would be tempted to issue dividends since, depending on the market, the price would soon drop again.
Picardo, E. (2019, March 12). Dividend vs. Buyback: Which Action Benefits Investors More? Retrieved March 16, 2019, from https://www.investopedia.com/articles/active-trading/073015/dividend- versus-buyback-which-better.asp
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In a “perfect world” capital market, how important is a firm’s decision to pay dividends versus repurchase shares?
Under what conditions would you have a tax preference for share repurchase rather than dividends? Would managers acting in the interests of long-term shareholders be more likely to repurchase shares if they believed the stock to be either undervalued or overvalued?
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