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Fundamentals of Corporate Finance, 4/c/e

Fundamentals of Corporate Finance, 4/e

Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Dividends and Dividend Policy

Internet Application Questions


1		Buying back a company's own shares is an alternative way of distributing corporate assets. In fact, share repurchases have overtaken dividends as the most popular means of cash payouts by corporations in the U.S. The following link explains the advantages of share repurchases, and also cautions against cases where repurchases have not or will not work. http://www.fool.com/EveningNews/FOTH/1998/foth981019.htm Discuss the following questions after reading the link above. Show that share repurchases and dividend payments are equivalent, in the sense that they do not affect relative corporate value. The link above argues that Circus Circus(NYSE: CIR) and Trump(NYSE: DJT) should have avoided buying back their shares. Do you agree with the admonition that highly leveraged firms should not use share buybacks? What are you assuming about dividend policy when you answer this question? The link also contends that share buybacks enhance shareholder value when done properly and cites three companies as virtuous examples: Coke(NYSE: KO), Intel(Nasdaq: INTC) and Chrysler(NYSE: DAJ). Keeping in mind that the article was written in October 1998, what lessons do you draw from the successful repurchase strategies of these firms?

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