A CFO is evaluating different options for returning value to

A CFO is evaluating different options for returning value to shareholders, and is considering 1) cash dividends, 2) stock dividends, or 3) share repurchases. Explain to her which you think is the best choice to deliver value to shareholders, and which you think is the worst. Be sure to justify your answer.

Solution

Cash Dividends and Stock Dividends, both result in shareholder wealth dilution. The former does so by means of share price reduction by an amount equal to the cash dividend per share, thereby reducing overall equity holders\' wealth. The latter increases the equity base, thereby diluting shareholders\' wealth.

Stock Repurchase, on the other hand, reduce the equity base, thereby keeping the stockholders\' wealth intact and yet returns money to them. Further, share repurchase is a way of demonstrating faith in the firm by its management which helps in propping up the stocks market price.