Topic 14, Exercise 2 Dividends and Share Repurchases A recent article by John B. Carlson entitled, “Why is the Dividend Yield So Low?” examines the cash distribution policies of corporations relative to the levels of stock prices. The dividend yield, which is the annual cash dividend per share divided by the price of a share, has decreased to record low levels over the past decade. The author provides insight on factors driving that decrease in dividend yield. After reading the article, answer the following questions: 1. Why might a firm use a share repurchase rather than an increase in dividends (assuming that the cash was available to undertake either option)? If a firm were to distribute the available cash by means of a cash dividend, that would signal the market that the firm was planning on a permanent increase in the dividend. Firms are reluctant to increase the cash dividend until they are sure that they can maintain the cash dividend on a permanent basis. An alternative that does carry the same signal to
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This note was uploaded on 09/13/2011 for the course FIN 6301 taught by Professor El-asmawanti during the Fall '09 term at University of Texas at Dallas, Richardson.