Consider the following Truman Inc and Carolina Inc are both

Consider the following: Truman Inc. and Carolina Inc. are both very similar firms, operating in the same industry. Truman has been using historically cash dividends only as its payouts to shareholders, while Carolina has been using many ways to payout shareholders: cash dividends, stock repurchases, stock dividends and DRIPs. Name at least 5 possible advantages that flexible and diverse payout policies might provide to Carolina vs. Truman Ind.

Solution

Soln : Cash dividends payout is the amount to be paid to the investors directly into their account as profit sharing. That is being done by Truman Inc. here

Carolina is paying in diversified manner like cash payout, stock dividends i.e. issuing stocks to the shreholders.

Advantages to Carolina for such dividend payout :

1) Stock dividend will allow company to retain cash and use it for growth of the company by using the cash.

2) Buyback /stock repurchase will boost investor confidence and will allow company to increase their net worth.

3) Company has to pay tax on cash dividend which they are paying, stock repurchase/stock dividend will help them to not pay any such taxes.

4) It will strengthen the relation between company and investir as company , by issuing stock dividend, will give an option to the shareholder to keep the shares as bonus or can convert it into cash if they require.

5) In case of share repurchase, if the stock is undervalued, it will reduce the outstanding shares and increase the EPS and improves performance like Return on equity.