Dividends and Return of Capital

Question 1

What should a firm do if the rate of return is less that WACC?

Answer 1

Repurchase shares or pay cash dividends

Question 2

What should a firm do if the rate of return is more than WACC?

Answer 2

Reinvest in other projects

Question 3

What are the advantages of issuing a dividend?

Answer 3

1. Can be one-time or ongoing
2. Contribute to the “yield” on a stock if ongoing regular dividends.
3. No impact on shares outstanding or EPS

Question 4

What are the advantages of a share buyback?

Answer 4

1. Reduces the number of shares outstanding.
2. Increases EPS