Dividend And Repurchases of stocks and bonds

Dividend And Repurchases of stocks and bonds

1. Dividend And Repurchases

2. Repurchases
•Repurchases refer to the purchasing of own
shares from the market.
•It may accomplish in three ways:
–Purchases from the open market at current share
price
–Buy back a fixed amount of shares above the market
value . For example, 10% above the current share
price
–Buy back from a major shareholder (green mailer)
after negotiation; the major shareholder is usually the
prospective bidder of a firm.

3. Repurchases
•In the 1980s, a new concept of share repurchases
emerged as an alternative payout mechanism
with the primary aim of increasing the earnings
per share ratio of the firm.
•As repurchase decrease the number of
outstanding shares; resulting in increase EPS.
•This method increased in popularity such that in
the US repurchases equalled 25.0% of total
earnings over the period 1984-98 as compared to
4.5% of total earnings for the period 1972-83

4. Divided and Re-Purchases
•Repurchases may be used a substitute of
dividend payment
•Either a firm pay cash dividend or repurchases
shares from the market.
•There is tax efficiency in repurchases as it is
taxed less than dividend.

5. Re-purchases and Signalling
•Share repurchase may give a signal to the
market about the manager’ confidence about
the future.
•When the company announce the repurchase
plan; the market perceive that the shares
have more worth as the firm is purchasing its
own shares.

6. •According to the Income Tax Ordinance of Pakistan
2001, the tax on cash dividend is 10.0% (Section 5) while
there is no taxation on share dividends. Up until June
2010, there was no taxation on capital gains; however,
from July 2010 and onward, capital gains are taxable
(Section 37A). The rate of tax to be paid for the tax year
2010 is 10.0% on securities traded for less than six
months and 7.5% for securities traded for more than six
months and less than one year. There is still no taxation
on capital gains of securities traded for more than one
year.