Cash Dividends Vs. Share Repurchase

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

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