EXERCISE 3–1 The purchase of treasury stock (commonly called stock buybacks) is being done with increasing frequency in lieu of dividend payments.

Required:

a. Explain why stock buybacks are similar to dividends from the company’s viewpoint.

b. Explain why managers might prefer the purchase of treasury shares to the payment of dividends.

c. Explain why investors might prefer that firms use excess cash to purchase treasury shares rather than pay dividends.