Question: Respond to the following memo as if you are the CEO. (Ask Questions if appropriate)

Memo: Mr. John Doe, CEO:

Before any decision is taken, it is important to consider the pros and cons of each one of the options in question. If the repurchasing of stock is considered, it might benefit the company because to repurchase its own shares reduces the number of shares held by the public. Even if profits remain the same, the earnings per share increase. This is especially true for non-selling shareholders if the price is undervalued. Moreover, some investors consider this to be the most tax efficient method of returning cash to shareholders, since there is no tax on repurchasing shares (Divident Growth Investors). Another benefit of repurchasing treasury stock is that it offers a potentially profitable investment for the management since the stock may be bought undervalued and re issued for profit when the market price increase. On the other hand, from the shareholder point of view, the repurchasing of stock represent a limitation over the choice of when to reinvest income. Instead, is the companys management who controls and decides about investment opportunities. Another disadvantage is that it limits the companys cash flow until the treasury stock is re-sold.

In the case that giving out high dividends is chosen, it is equally important to consider some of the benefits and drawbacks. A benefit to it is that investors have a positive perception of companies that have a track record of paying dividends as it reflects positively on its stability. This indicates predictable earnings to investors and thus, makes the company a good investment. Therefore, when a company announces the dividend payments, it gives a strong signal about the future prospects of the company.

From the shareholders point of view, one of the drawbacks is that there are many limitations to have access to the cash in the form of dividends since the board of directors has full authority to decide the amount of income to distribute and when. Another drawback is that the payment of a large cash dividend could lead to liquidity problems for the company as it decrease its retain earnings. In some cases, current liabilities may make a cash dividend inappropriate since obligations and expenses can rise unexpectedly and not enough cash to cover them can be catastrophic.

Jane Doe, CFO