17.5 Specialized Dividend Plans
We now consider two specialized dividend plans: stock repurchases and dividend reinvestment programs.
Stock Repurchase
Many companies forgo the formal cash dividend process and instead use the cash that they would normally use to pay dividends to buy back their own shares on the open market. This process constitutes a stock repurchase plan. The effect is to reduce the number of shares outstanding and increase earnings per share. Clearly, a company’s EPS increases when you reduce the number of shares outstanding, but the firm’s value does not change.
MyFinanceLab Video
Example 17.6 Share repurchase, EPS, and firm value
Problem
Storm Guard, Inc., an all-equity firm, shows the following abbreviated income statement ...
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