{"id":15796,"date":"2021-05-29T07:07:16","date_gmt":"2021-05-29T07:07:16","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=15796"},"modified":"2026-09-02T05:50:17","modified_gmt":"2026-09-02T05:50:17","slug":"equivalence-of-cash-dividends-and-share-repurchases","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equivalence-of-cash-dividends-and-share-repurchases\/","title":{"rendered":"Equivalence of Cash Dividends and Share Repurchases"},"content":{"rendered":"<p><script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"A company with free cash flow is deciding whether to pay cash dividends or repurchase shares at the prevailing market price. Which of the following is the most likely reason the company will choose to repurchase shares?\",\r\n    \"answerCount\": 3,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct answer is B. Share repurchases afford management and shareholders more flexibility. Unlike cash dividends, share repurchases allow management to choose the timing and amount of repurchases, enabling the company to buy back shares when they believe they are undervalued. Repurchases also provide shareholders with greater flexibility in deciding whether to participate.\"\r\n    },\r\n    \"suggestedAnswer\": [\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"Share repurchases are faster to execute.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"Share repurchases afford management and shareholders more flexibility.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"Share repurchases reduce financial leverage.\"\r\n      }\r\n    ]\r\n  }\r\n}\r\n<\/script><\/p>\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/hn2pw6Mx4OQ\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n<p>Share repurchase announcements are followed by positive returns from the announcement date and for the next two years. This is because management tends to buy back their shares when undervalued and sell them when they are overvalued. All other things being equal, cash dividends are equivalent to share repurchases of equal amount on their effect on shareholders&#8217; wealth.<\/p>\r\n<div style=\"text-align: center; margin: 28px 0;\"><a style=\"display: inline-block; padding: 14px 28px; border-radius: 9999px; background: #1a73e8; color: #ffffff; font-size: 16px; font-weight: 500; line-height: 1.2; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Practice CFA Level II dividend and repurchase concepts with our Free Trial. <\/a><\/div>\r\n<p>Some of the reasons why a company may choose share repurchases are:<\/p>\r\n<ul>\r\n\t<li><em><strong>Potential tax advantages:<\/strong> <\/em>Share repurchases have a tax advantage over cash dividends in countries with higher tax rates than capital gains.<\/li>\r\n\t<li><em><strong>Share price signaling that the company considers its shares a good investment:<\/strong> <\/em>Investors often interpret the announcement of share repurchase as a positive signal about the company&#8217;s prospects and attractiveness of investing in the company.<\/li>\r\n\t<li><em><strong>Added managerial flexibility:<\/strong> <\/em>Share purchases via open market purchases allow management to time share repurchases when the market prices are favorable. Share repurchases are also flexible for shareholders because their participation is optional.<\/li>\r\n\t<li><em><strong>Increasing financial leverage:<\/strong><\/em> Share buybacks are used to finance newly issued debt, expanding the company&#8217;s financial leverage.<\/li>\r\n\t<li><em><strong>Offsetting dilution from employee stock options:<\/strong> <\/em>Many companies will opt to repurchase as many shares as possible from employee stock options to avoid dilution.<\/li>\r\n<\/ul>\r\n<p>A company is at liberty to use both share repurchases and special cash dividends as an alternative to cash dividends. This occurs when there is an extraordinarily large increase that will not continue in the future. The volume of share repurchases increases when companies have more cash and the economy is strong.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>A company with free cash flow considers whether it should pay cash dividends or repurchase shares at the prevailing market price.<\/p>\r\n<p>Which one of the following is the <em>most likely<\/em> reason a company will opt to repurchase shares?<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>Share repurchases are faster to execute.<\/li>\r\n\t<li>Share repurchases afford management and shareholders more flexibility.<\/li>\r\n\t<li>Share repurchases reduce financial leverage.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is B.<\/strong><\/p>\r\n<p>Share repurchases give more time to manage to wait and repurchase the shares when undervalued and sell the shares when they are overvalued.<\/p>\r\n<p><strong>A is incorrect.<\/strong>\u00a0Cash dividends are faster to execute than share repurchases.<\/p>\r\n<p><strong>C is incorrect.<\/strong>\u00a0Repurchase of shares increases financial leverage when the cash from the repurchase is used to fund newly issued debt.<\/p>\r\n<\/blockquote>\r\n<p>Reading 18: Analysis of Dividends and Share Repurchases<\/p>\r\n<p><em>LOS 18 (k) Explain the choice between paying cash dividends and repurchasing shares.<\/em><\/p>\r\n\r\n<div style=\"text-align: center; margin: 30px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 12px 26px; border-radius: 9999px; background: #1e5bd8; color: #ffffff; font-weight: bold; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Start Free Trial \u2192 <\/a>\r\n<p style=\"margin-top: 12px; font-size: 16px; line-height: 1.5;\">Access CFA Level 2 study notes, practice questions, mock exams, and video lessons to strengthen your understanding of cash dividends, share repurchases, and payout policy applications.<\/p>\r\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Share repurchase announcements are followed by positive returns from the announcement date and for the next two years. This is because management tends to buy back their shares when undervalued and sell them when they are overvalued. All other things&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,346],"tags":[216,344,379,368],"class_list":["post-15796","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-corporate-finance-cfa-level-2","tag-cfa-level-2","tag-corporate-finance","tag-equivalence-of-cash-dividends-and-share-repurchases","tag-reading-21analysis-of-dividends-and-share-repurchases","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Cash Dividends vs Share Repurchases | CFA Level 2<\/title>\n<meta name=\"description\" content=\"Learn when cash dividends and share repurchases are equivalent and why companies choose one payout method over the other. Read more.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equivalence-of-cash-dividends-and-share-repurchases\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Cash Dividends vs Share Repurchases | CFA Level 2\" \/>\n<meta property=\"og:description\" content=\"Learn when cash dividends and share repurchases are equivalent and why companies choose one payout method over the other. Read more.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equivalence-of-cash-dividends-and-share-repurchases\/\" \/>\n<meta property=\"og:site_name\" content=\"CFA, FRM, and Actuarial Exams Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2021-05-29T07:07:16+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-09-02T05:50:17+00:00\" \/>\n<meta name=\"author\" content=\"Irene R\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Irene R\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/equivalence-of-cash-dividends-and-share-repurchases\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/equivalence-of-cash-dividends-and-share-repurchases\\\/\"},\"author\":{\"name\":\"Irene R\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/7002f30d8f174958802c1c30b167eaf5\"},\"headline\":\"Equivalence of Cash Dividends and Share Repurchases\",\"datePublished\":\"2021-05-29T07:07:16+00:00\",\"dateModified\":\"2026-09-02T05:50:17+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/equivalence-of-cash-dividends-and-share-repurchases\\\/\"},\"wordCount\":441,\"keywords\":[\"CFA-level-2\",\"Corporate Finance\",\"Equivalence of Cash Dividends and Share Repurchases\",\"Reading 21Analysis of dividends and Share Repurchases\"],\"articleSection\":[\"CFA Level II Study Notes\",\"Corporate Finance\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/equivalence-of-cash-dividends-and-share-repurchases\\\/\",\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/equivalence-of-cash-dividends-and-share-repurchases\\\/\",\"name\":\"Cash Dividends vs Share Repurchases | CFA Level 2\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#website\"},\"datePublished\":\"2021-05-29T07:07:16+00:00\",\"dateModified\":\"2026-09-02T05:50:17+00:00\",\"author\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/7002f30d8f174958802c1c30b167eaf5\"},\"description\":\"Learn when cash dividends and share repurchases are equivalent and why companies choose one payout method over the other. Read more.\",\"breadcrumb\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/equivalence-of-cash-dividends-and-share-repurchases\\\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/equivalence-of-cash-dividends-and-share-repurchases\\\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/equivalence-of-cash-dividends-and-share-repurchases\\\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Equivalence of Cash Dividends and Share Repurchases\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#website\",\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/\",\"name\":\"CFA, FRM, and Actuarial Exams Study Notes\",\"description\":\"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/7002f30d8f174958802c1c30b167eaf5\",\"name\":\"Irene R\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g\",\"url\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g\",\"contentUrl\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g\",\"caption\":\"Irene R\"}}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/hn2pw6Mx4OQ\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"4147\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2021-05-29T07:07:16+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Cash Dividends vs Share Repurchases | CFA Level 2","description":"Learn when cash dividends and share repurchases are equivalent and why companies choose one payout method over the other. Read more.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equivalence-of-cash-dividends-and-share-repurchases\/","og_locale":"en_US","og_type":"article","og_title":"Cash Dividends vs Share Repurchases | CFA Level 2","og_description":"Learn when cash dividends and share repurchases are equivalent and why companies choose one payout method over the other. Read more.","og_url":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equivalence-of-cash-dividends-and-share-repurchases\/","og_site_name":"CFA, FRM, and Actuarial Exams Study Notes","article_published_time":"2021-05-29T07:07:16+00:00","article_modified_time":"2026-09-02T05:50:17+00:00","author":"Irene R","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Irene R","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equivalence-of-cash-dividends-and-share-repurchases\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equivalence-of-cash-dividends-and-share-repurchases\/"},"author":{"name":"Irene R","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/7002f30d8f174958802c1c30b167eaf5"},"headline":"Equivalence of Cash Dividends and Share Repurchases","datePublished":"2021-05-29T07:07:16+00:00","dateModified":"2026-09-02T05:50:17+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equivalence-of-cash-dividends-and-share-repurchases\/"},"wordCount":441,"keywords":["CFA-level-2","Corporate Finance","Equivalence of Cash Dividends and Share Repurchases","Reading 21Analysis of dividends and Share Repurchases"],"articleSection":["CFA Level II Study Notes","Corporate Finance"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equivalence-of-cash-dividends-and-share-repurchases\/","url":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equivalence-of-cash-dividends-and-share-repurchases\/","name":"Cash Dividends vs Share Repurchases | CFA Level 2","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/#website"},"datePublished":"2021-05-29T07:07:16+00:00","dateModified":"2026-09-02T05:50:17+00:00","author":{"@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/7002f30d8f174958802c1c30b167eaf5"},"description":"Learn when cash dividends and share repurchases are equivalent and why companies choose one payout method over the other. Read more.","breadcrumb":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equivalence-of-cash-dividends-and-share-repurchases\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equivalence-of-cash-dividends-and-share-repurchases\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/equivalence-of-cash-dividends-and-share-repurchases\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/study-notes\/"},{"@type":"ListItem","position":2,"name":"Equivalence of Cash Dividends and Share Repurchases"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/study-notes\/#website","url":"https:\/\/analystprep.com\/study-notes\/","name":"CFA, FRM, and Actuarial Exams Study Notes","description":"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/study-notes\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/7002f30d8f174958802c1c30b167eaf5","name":"Irene R","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/secure.gravatar.com\/avatar\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g","url":"https:\/\/secure.gravatar.com\/avatar\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/33caf1e1bcb63ee970b36351f165c7bc714b19614993ab9c2c8bf36273b7df48?s=96&d=mm&r=g","caption":"Irene R"}}]},"og_video":"https:\/\/www.youtube.com\/embed\/hn2pw6Mx4OQ","og_video_type":"text\/html","og_video_duration":"4147","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2021-05-29T07:07:16+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/15796","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/comments?post=15796"}],"version-history":[{"count":14,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/15796\/revisions"}],"predecessor-version":[{"id":45433,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/15796\/revisions\/45433"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/media?parent=15796"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/categories?post=15796"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/tags?post=15796"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}