From the left column of the table below, select one company that has undertaken a share repurchase. From the right column, select one company that has undertaken a share split. Contrast and compare the reasons for their decisions and evaluate the impact on each company. Refer to Week 9 lecture notes for a review of concepts related to Dividend Policy
The company that I selected is Microsoft Company that performs a stock split and the company that performs a repurchase of its shares is Oracle Company.
Stock split refers to the company decision of issuing new shares to the existing shareholders of an organization on the basis of their holding. That is the proportion of ones holding in an organization is used as the ration of issuing new shares to the existing shareholders (Lazonick, 2008).
The share repurchase is the firm’s decision to buy back or acquire its own stock so as to make a relative and a flexible way of returning the money to the shareholders.
Reasons why the two companies perform a stock split and stock repurchase
The two companies that are Microsoft and Oracle perfumed the two operations so as to increase its level of capitalization and make its shareholders better when it comes to raising the capital in the organization. On the other hand, Oracle also perform the share repurchase with the main implication being to meet the firms level of obligation, that is a change in the tax code and this will help the firm be in a position of meeting the tax obligation and increase its level of compliances, (Elgonemy, 2000)
Both firms performed the stock split and share repurchase with the aim of stabilizing the market. That is through the stock split by the firm, the market remained stable and in this case, it means that the firm stood in a position of meeting its obligation and the shareholders remain in the same capitalization it was before the split and at the same time, with Oracle company, performing a share repurchase was to stabilize its market so as to remain in a stable position of compliances to the tax regulations.
Both are geared towards increasing the yield of the organization. That is with stock buyback, it means that the firm tries to refund the money back to its shareholders and on the other hand, with the stock split the firm tries to reduce the buying prices of stock and stabilizing the firms level of capitalization. All these are performed with the main implication being to make the firm stable increase the dividends yield in the organization.
Both are performed by the company with the aim of strengthening the firm and in the long run, it will lead to a better capitalization of the organization. Since, when an organization split its shares, it tries to diversify the stock and make these firms better in terms of yield and increase its sustainability as an organization, (Greenwood, 2009).
Both help the firm to jump in a stock position where it will stand in a position of increasing its credit rating as this shows that there is less capitalization as the organization works towards establishing a well-structured capital structure.
Both increase the efficiency of the organization. That is through a stock split, it will help the firm attain a stock capitalization that helps in increasing the value of the firm. On the other hand, efficiency is attained by stock repurchase as the cost that will be used by the company will have been reduced and this will help to increase the level of firms cost hence increasing its cost efficiency.
The main aim of Microsoft performing stock split is for the purpose of capitalization and the end result is that it lead to a reduction in the price of shares whereas, on the other hand, repurchase of shares by the oracle lead to an increase in the capitalization and the share price increased, (Cusumano, 2008).
The main rationale of a stock split is to increase the number of shares that are available for the public to trade in and in the long run, it will help the firm meet its obligation and increase the public shares to be availed for purchase. Whereas with the repurchase, it helped the firm to reduce the number of shares that are offered to the public and its main rationale is to reduce the shares that are offered to the public for subscription.
Stock split leads to the strong price action of the company shares whereas stock repurchase is only performed by the company with its main rationale being to ensure that the firm attains stability and lower the cost of stock management when it is trading publicly.
The strategy that is performed by the company is to ensure that having repurchase or stock split is to ensure that there are better performance and effectiveness as an organization. It also ensures that as a firm, the management stands in a position to control the factors within the company, lowers its level of profitability and increase the value of the organization as it trades publicly.
Listing the stock in an organization is a way of increasing the number of shareholders within the company hence increasing the level of stocks in the company. To attain this strategy, stock split and stock repurchase will ensure that as an organization, it stands in a position of influencing the general public to work towards attaining sustainable growth in their shares portfolio in the company.
Stock split and stock repurchase are for the protection of the shareholders. It ensures that as an organization, the dividends yield is sustained and that as an organization, there is an improvement in the firm’s level of capital growth and its sustainable performance.
Cusumano, M. A. (2008). Microsoft secrets: how the world’s most powerful software company creates technology, shapes markets, and manages people. Simon and Schuster.
Elgonemy, A. R. (2000). The pricing of lodging stocks. A reality check. Cornell Hotel and Restaurant Administration Quarterly, 18-28.
Greenwood, R. &. (2009). Investor activism and takeovers. Journal of Financial Economics, 362-375.
Lazonick, W. (2008). The quest for shareholder value: stock repurchases in the US economy. Recherches Économiques de Louvain/Louvain Economic Review, 479-540.
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