1. finance question?

Question

1. Compare a regular cash dividend with a periodic share repurchase. Which has greater appeal to you? Explain.
2. Explain a stock dividend and further explain if you would prefer it to a cash dividend.
3. What are stock splits and how desirable are they?

Answer 1

In both cash dividends and share repurchases, the company is returning cash to its investors. With repurchases, only those who want to lower their investment in the company do so -- while with a dividend everyone lowers his investment in the firm.

There is also a tax story. Dividends are taxed on the full amount -- while cash returned to those who sell when shares are repurchased only pay taxes on the capital gains. Prior to a few years ago, this was a huge difference, as dividends were taxed at the higher ordinary income tax rate. They are now taxed at the same rate as capital gains -- so the tax story is lessened.

The other difference is that the company makes a long term commitment when they pay dividends. The market punishes them for lowering or stopping dividends. On the other hand -- a repurchase can be a one time thing.

Stock dividends are really a lot like stock splits -- except you get one share for multiple shares with stock dividends & multiple shares per share for stock splits. There is an accounting difference in terms of shifting value from one equity account to another -- but it has no economic significance.

In theory, stock splits should not change the value of the firm -- with a 2-1 stock split causing the price to drop by half. In practice, there is usually a slight increase in value. I believe that this is due to the fact that lower priced stocks become more liquid.

Answer 2

Your questions 1 and 2 are basically the same, only termed differently. If You opt for a cash dividend this means they will send You a check or deposit to Your account what the company declares as a dividend. Example, You own 100 shares of Company "X" they declare a quarterly dividend (3 months) of $.10 a share, this equates to $10.00. The Government considers this income, which is taxable. So of the $10.00 You would probably put $7.00 in your pocket, $3.00 going to the Government. If You opted for the periodic share repurchase or stock dividend, this means You are opting for more of that Company's or Institutions stock. Example, say the 100 shares of Company "X" where trading at $10.00 a share, times the $.10 dividend would equal 1 share, You would now own 101 shares of that Company or Institution, but would pay No tax, because You have re-invested the money into the Company or Institution. As for stock splits, it depends on the Company and it's possibility for explosive growth. I can remember when My daughter told Me to buy Yahoo, and I said what? I didn't know what the Internet was, a $2,200.00 investment, after stock splits would have made Me $128,000.00. Guess who missed that boat! But this is the exception and not the rule!