EXERCISE 312: Dividends versus Treasury Stock

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 companys 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.