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2. Compare teh payment of cash divididends, stock dividends and purchase of treasury stock
from existing shareholders. What are the similiarities and differences? If you were a corporate
treasurer, which method would you recomend for returning funds to stock holders?
Solution
Dividends are payments made by a corporation to its shareholder members. [ It is the
portion of corporate profits paid out to stockholders.[1]
When a corporation earns a profit or surplus, that money can be put to two uses: it can
either be re-invested in the business (called retained earnings), or it can be distributed to
shareholders. There are two ways to distribute cash to shareholders:
share repurchases or dividends.[2][3] Many corporations retain a portion of their earnings
and pay the remainder as a dividend. stock dividend A dividend paid as additional shares
of stock rather than as cash. If dividends paid are in the form of cash, those dividends are
taxable.
When a company issues a stock dividend, rather than cash, there usually are not tax
consequences until the shares are sold.
Companies often buy back their own stock which lowers the number of shares outstanding.
When a company does a stock buyback, the stocks they purchase on the open market
become known as treasury stock. These stocks do not pay dividends nor do they have
voting rights. Treasury stocks are not included in shares outstanding calculations.
When a company buys back its own shares, it can either be advantageous to the
shareholders or a detriment depending on the motivation for buying back the shares in the
first place. If the company is seeking to boost its financial ratios such as their P/E ratio or
earnings per share ratio, then the shareholders
2- Compare teh payment of cash divididends- stock dividends and purcha.docx

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2- Compare teh payment of cash divididends- stock dividends and purcha.docx

  • 1. 2. Compare teh payment of cash divididends, stock dividends and purchase of treasury stock from existing shareholders. What are the similiarities and differences? If you were a corporate treasurer, which method would you recomend for returning funds to stock holders? Solution Dividends are payments made by a corporation to its shareholder members. [ It is the portion of corporate profits paid out to stockholders.[1] When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders. There are two ways to distribute cash to shareholders: share repurchases or dividends.[2][3] Many corporations retain a portion of their earnings and pay the remainder as a dividend. stock dividend A dividend paid as additional shares of stock rather than as cash. If dividends paid are in the form of cash, those dividends are taxable. When a company issues a stock dividend, rather than cash, there usually are not tax consequences until the shares are sold. Companies often buy back their own stock which lowers the number of shares outstanding. When a company does a stock buyback, the stocks they purchase on the open market become known as treasury stock. These stocks do not pay dividends nor do they have voting rights. Treasury stocks are not included in shares outstanding calculations. When a company buys back its own shares, it can either be advantageous to the shareholders or a detriment depending on the motivation for buying back the shares in the first place. If the company is seeking to boost its financial ratios such as their P/E ratio or earnings per share ratio, then the shareholders