Thursday
November 27, 2014

Homework Help: Unit 4 - Investing

Posted by candy on Thursday, August 3, 2006 at 10:10am.

Compare a regular cash dividend with a periodic share repurchase. Which has greater appeal to you? Explain.

Explain a stock dividend and further explain if you would perfer it to a cash dividend.

What are stock splits and how desirable are they?

Please help me understand. candy :(


If a company repurchases shares from its cash reserves, the number of shares outstanding decreases and, in principle at least, each remaining shareholder has a greater share of the company. It has been my experience that this does not result in a noticeable near-term increase in share value, however. This may be because, in many cases, the purchased stares are salted away to be used for stock options for highly paid managers. I would prefer the cash in the hand as a cash dividend. Companies that issue special cash dividends, when they have more cash then they can use to good advantage, are usually the ones that have the wellfare of stockholders uppermost in their mind.

Stock dividends iare an issuance of small amounts of stock, such as one share for each ten shares already owned, instead of a cash dividend. The recipient ends up with more shares of a company in which each share has been diluted by the issuance of news stock. You also have to pay some broker a commision oin order to get thecash. Don't be fooled by this gimmick. Avoid companies that do it.

Stock splits are a bit like stock dividends but usually can be considered more meaningful and beneficial for psychological reasons. Typically, you are given two shares in place of the one you already own, or three for two, or three for one. This reduces the price of the stock in the same ratio, so the immediate result is that you have gained nothing. However, it tends to induce, or seduce, more buyers to purchase the stock at the new "lower price per share" and this usually helps the stock increase in value in the long run. The bottom line is that stock splits are a bookkeeping device to make the shareholders feel good by holding more shares, but it does not increase their stake in the company. It is, however, a signal to other investors that the stock is doing well.

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