A company has a cash surplus which it wishes to distribute to shareholders by a share repurchase rather than paying a special dividend.
Which THREE of the following statements are correct?
A.
The payment of a special dividend could raise shareholders' expectations of similar distributions in the future, unlike a share repurchase.
B.
The share repurchase could send a negative signal to shareholders as it could be interpreted as a failure of management to find suitable investment opportunities.
C.
Determination of the repurchase price will be easy as shareholders will insist on receiving the open market price.
D.
Different tax regimes could result in shareholders having a preference for a share repurchase due to the often more preferential tax treatment of capital gains.
E.
The share repurchase, if approved by the shareholders, will be binding on all of the company's shareholders.
A – True. A special dividend can create expectations of similar future payouts, while a buyback is more clearly one-off.
B – True. A repurchase can be interpreted by some investors as management having no positive-NPV projects, i.e. a possible negative signal about growth opportunities.
C – False. The repurchase price is not automatically the open-market price; it may involve negotiation or a premium/discount.
D – True. In many tax regimes, capital gains (from buybacks) are taxed more favourably than dividend income, so some shareholders may prefer repurchases.
E – False. Even if approved, individual shareholders are usually free to choose whether or not to tender their shares.
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