Consider dividend policy, stock repurchases, and stock splits.Discuss how invest

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Explanation / Answer

Dividend refers to sharing the profits of the company with the shareholders. It will increase the return on a stock

Example, Price of X today is 50, the price of X next year is 60, company announces $2 dividend for each share. P holds 100 shares. What will be his return

Return = P1 - P0 +D/ P0 * 100

=(60-50)+2/50 * 100 = 24%

Return without dividend = 60-50 / 50 * 100 = 20%

So, a dividend has increased the return

Stock Split is when a company divides the face value of the stock into small denomination

For eg, in the previous illustration, the company divides the face value of share from 10 to 5. Total no of shares P had previously changes from 100shares to 200 shares

So his return was = {(60-50)+2}*100/ 50* 100      * 100    =24%

When face value is 5

Return is {(60-50)+2|*200 / 50 * 200        * 100           = 24%

So, there is no change in overall gain to shareholder

Stock repurchase also known as treasury stock is when the company purchases back exces shares from the market to reduce the existing shareholding,A repurchase would facilitate higher return to existing shareholder

Eg, Net Income = 20000, Total share isuued = 20000at $10 face value

Return on equity = 20000 / (20000*10) = 10%

Now, compnay buy backs 20% of existing shareholding

New No of shares = 16000 at $ 10

Return on equity = 20000 / 16000*10         *       100 = 12.5%

So, the return on equity has increased

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