ome stockholders want and expect to receive dividends, whereas others would rath
ID: 2799878 • Letter: O
Question
ome stockholders want and expect to receive dividends, whereas others would rather see those funds invested in the company to increase its stock process. The behavior of most firms and stockholders suggests that dividend policy affects share prices. Discussion Questions: 1. Microsoft has spent cash for regular dividends, a special dividend, and stock buybacks. From the shareholders’ viewpoint, what value have they received from each of the three projected cash disbursements? 2. Do you agree that corporate managers would manipulate their stock’s value prior to a buyback, or do you believe that corporations are more likely to initiate a buyback to enhance shareholder value?
Explanation / Answer
(1).
Each type of dividend policy have its own positives and negatives. Thus let’s see possible positives from the shareholders’ viewpoint;
In case of Cash Dividend;
Shareholders will receive a regular cash income on their investment but there will be some negative impact on the shareholders like; shareholders need to pay tax on the receipts value of the dividends hence it will lower the final received value. Apart from this cash dividend also reduce the price of the share. So we can say that overall cash dividend have some positive and negative impact on the shareholders.
In case of a special Dividend;
In case of a special dividend, there are less complexities for shareholders in compare to cash dividend. In cash of this type of dividend policy total value of the firm or total value for shareholders will be same before or after this dividend. Only number of shares will be chnages and price of share will be reduced.
Under this type of dividend policy number of shares will increased but per share price will increase.So as a result totalvalue will be same.
In case of a Stock Buy back;
In this case number of outstanding shares reduced due to buy-back of shares by the company hence EPS will improve because due to less number of shares there will be high EPS. So in future time it will also helps in improving the market price of the shares. So as a result we can say that overall value of the shareholders’ will improve.
(2).
It will depend on the conditions and motive of the corporate managers. So clearly you can not say that all buybacks are done by the corporate managers to manupulate stock’s value prior to buyback or all buybacks are done to maximize the stockholders’ value.
So we can say that if corporate managers are looking to take advantage of price gaps of the stocks before or after the buyback then definitely corporate managers are trying to manupulating the the stock’s value for selling same stocks in the market at higher prices.
If corporate managers honestly want to minimize the numbers of outstanding shares so that available profits can be transferred to less number of shareholders then we can say that corporate managers truly working for maximizing the stockholders’ value.
So answer totally depends on the intention of the corporate managers.
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