Skip to content

IAI Actuarial Core Principles · Business Finance · Capital structure and dividend policy

Compared with paying an equivalent cash dividend, which is a commonly cited advantage of a share buyback for a company's continuing shareholders?

A buyback offers flexibility: only shareholders who choose to sell receive cash, and the company does not create an expectation of a repeated payment as a higher regular dividend would. It does not guarantee a price rise and it reduces equity.

  1. AIt is compulsory for all shareholders to participate
  2. BIt gives shareholders flexibility, since only those who sell receive cash, and the payout need not imply a permanent commitmentCorrect
  3. CIt always increases the share price by the amount of cash paid out
  4. DIt increases the company's equity base
  5. It removes the need to hold any retained earnings

Explanation

Buybacks are optional for holders and flexible in timing, avoiding an expectation of repeat payments. They do not guarantee a price rise, and they reduce rather than increase equity. Participation is not compulsory in market purchases.

Did you get it right without looking?

One question tells you little. A timed set on Capital structure and dividend policy shows your real accuracy, how long you take and where you lose marks.

Practise Capital structure and dividend policyFree diagnostic mock

More Capital structure and dividend policy questions