This frontmatter description will appear below the title

Example Post

Both the cash dividends and share repurchase of same value have equivalent effect on the wealth of the shareholders. This assumes that all other factors such as the taxation are the same.

Let's take an example to understand this. Assume a company with the following information:

Shares outstanding: 1 million

Market value: $20 per share

Company profits: $5 million

Profits distributed: $1 million

The company has two alternatives:

Pay cash dividends at $1 per share

Repurchase stock equivalent to $1 million

Let's calculate the impact of wealth in both cases.
<h2>Cash Dividends</h2>
<div class="formula1">

After the dividends are paid, the ex-dividend price would be: $20 - $1 = $19 per share

This can also be calculated as follows:

= ((1 million shares * $20 per share) - $1 million dividends)/1 million shares

= $19 per share

So, the shareholder has a stock worth $19 and $1 in cash that he receives in the form of cash.

Total wealth for each share = $19 + $1 = $20

</div>
<h2>Share Repurchase</h2>
<div class="formula1">

For $1 million, the company will purchase 1,000,000/20 = 50,000 shares. The share price after repurchase can be calculated as follows:

= ((1 million shares * $20 per share) - $1 million dividends)/(1 million shares - 50,000 shares)

= $19,000,000/950,000

= $20

Total wealth for each share  = $20

</div>
As you can see, in both cases the shareholder's wealth remains the same. So, practically, cash dividends have the same impact on shareholder's wealth as the share repurchase.

What are Dividends?

Types of Dividends

Cash Dividend

Stock Dividends

Stock Splits and Reverse Stock Splits

Dividend Payment Dates

What is Share Repurchase and Methods of Share Repurchase

Impact of Share Repurchases on Financial Ratios

Cash Dividends Vs. Share Repurchase

Dividends and Share Repurchases

Corporate Finance

Learn the fundamentals of R programming language and how to start using it for finance.​

Getting Started with R Programming

Learn the fundamentals of R and its application in finance with this bundle of 6 books.​

R Programming - Data Science for Finance Bundle

Unlock the Power of Machine Learning in Finance with Our Ebook!​

Machine Learning in Finance using Python

Learn to model credit risk using statistical models such as logistic regression and decision trees with real-life data​

Credit Risk Modeling with R

A step-by-step approach to building solid quantitative trading strategies using R​

Quantitative Trading Strategies with R

Learn the fundamentals of analyzing a financial time series in R​

Financial Time Series Analysis with R

Excel spreadsheets containing calculators related to option pricing, option greeks, and option trading strategies​

Options Trading - Excel Spreadsheets Bundle

A practical guide to analyzing derivatives instruments such as Futures Contracts and Options with R programming.​

Derivatives Modeling with R

This bundle contains spreadsheets to help calculate value-at-risk in excel.​

Value at Risk - Excel Spreadsheets Bundle

Learn how to create beautiful data visualizations in R using Base R graphics and ggplot2​

Data Visualization with R

Learn the fundamentals of Python programming essential for data science​

Cash Dividends Vs. Share Repurchase

This content is for paid members only.