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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