Effect of Share Repurchase on Book Value Per Share

When the market price per share is greater than its book value, the book value per share will reduce after share repurchases. The book value per share will increase after repurchases when the market price per share is less than…

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Effects of Repurchases on Earnings per Share

Share repurchase may increase, decrease, or have no effect on EPS depending on how the repurchase is financed. $$\text{EPS}=\frac{\text{Net income (NI)}}{\text{Shares outstanding}}$$ If the net income is constant, a smaller number of shares after the buyback leads to a higher…

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Share Repurchases

A share repurchase is a decision by a company to buy back its shares from the marketplace using corporate cash. Hence it can be viewed as a cash dividend alternative. Treasury shares are stocks that have been repurchased to be…

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Payout Policies

In this section, we shall discuss the three types of dividend policies: Stable Dividend Policy A stable dividend policy is one where the dividends paid do not reflect short-term volatility in earnings. It is the most common because managers are…

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Tax Systems and Dividend Policy

Double Taxation System Under the double taxation system, earnings before tax (EBT) are taxed at a corporate level and then taxed again as dividends after the earnings are distributed to shareholders. Let us illustrate this in the table below. $$…

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Factors Affecting Dividend Policy

Some of the factors that affect dividend policy include: 1. Investment Opportunities Other factors are held constant. A company with more profitable investment opportunities will tend to pay fewer dividends than a company with fewer opportunities because the latter has…

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Effect of Agency Costs on Payout Policy

Agency Costs and Dividends When shareholders and managers are two separate parties, managers may have an incentive to maximize their welfare at the company’s expense by choosing negative NPV projects that expand a managers’ span of control but generates negative…

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The Information Content of Dividend Actions: Signaling

< Modigliani and Miller assumed that both inside and outside investors have similar information about a company. However, in reality, outside investors have less detailed information about a company relative to the managers. Outsiders may use dividend signals to get…

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Theories of Dividend Policy

Dividend policy dictates the amount and timing of dividend payments. Two groups of financial theorists have different opinions on the dividend policy, with one group claiming that the dividend policy is irrelevant to shareholders. In contrast, another group claims that…

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Types of Dividends

A dividend is a distribution of profits paid to shareholders. The payment of dividends to shareholders is not a company’s legal obligation, and they are subject to different tax treatment for both the shareholder and the company. A payout policy…

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