Scenario

You are the Chief Financial Officer of Arcadian Limited. The CEO, Mr Mark Riley has just returned from a conference of top managers, held at a prestigious University in Australia where the issue of share buy-backs and dividends were debated. He was particularly puzzled after hearing the quote below:

When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as share repurchases (buy-backs). - (Warren Buffet, 1984)

Arcadian Limited has always prided itself as a company that paid its shareholders regular dividends. Therefore, Mark was worried about this quote. He has asked you for help in understanding the debate.

Required:

Write a short memorandum format report to the CEO, Mark Riley. In this report please discuss what dividends and share buy backs are. Also, discuss at least TWO accounting/economic implications of paying dividends to shareholders and at least TWO accounting/economic implications of undertaking share buy-backs.

Note: Your discussion should include reference to relevant professional/academic authorities and accounting standards (where necessary).