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In theory, what happens to the shareholder’s worth before and after he/she receives a dividend from the company.

The worth of shareholders before and after receiving dividends from the company depends on whether it is cash dividends or stock dividends. The value of that dividend issued to shareholders are deducted from its retained earnings, even if the dividend is issued as additional and transfers the funds from retained earnings to paid-in capital. Whilst, a cash dividend results in a straight reduction of retained earnings that reduces stockholders’ equity. A stock dividend simply rearranges the allocation of equity funds.

What are the advantages of stock repurchases versus paying dividends?

     Paying dividends or by buying back company shares are the two main ways companies reward their shareholders. A share of profit that a company pays at regular intervals to its shareholders is called dividends. It is one of the most significant sources of financing for the firm in terms of raising funds for investments and is generally paid in cash, but they may also come in the form of stocks, stock options, debt payments, property, or even services. Stock repurchase means buying by a company of its own shares from the marketplace and giving each remaining share a larger percent ownership in the business. Companies can fund its buyback by taking on debt, cash on hand, or with its cash flow from operations. An advantage of stock repurchase over dividend is it reduces the numbers of outstanding shares which usually increases per-share and profitability measures such as EPS, cashflow per share and return on equity. This signals a better performance and help drive for a higher stock price, resulting in capital gains for the shareholders. Another advantage of stock repurchase is that profits will not be taxed until the shareholder’s shares are sold and gains are made on the shareholdings. Dividends paid to shareholders are charged an additional 15% tax per the U.S. tax code.

What is the difference between a stock dividend and a stock split?

     Companies tend to keep their stock prices within optimal trading range to be competitive in the market place and when a company feels its stock is above the popular price range for their stock, they split their stocks. For example, company X currently have 1,000,000 shares at $50.00 and decided to split their stocks 2-for-1 stock split, there would now be 2,000,000 shares priced at $25.00. Stock splits increases the number of shares outstanding and reduces the par value per share, thus the value of the corporation will remain the same. company uses the split to bring the stock price into the desired range to make it more affordable for investors.

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