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With reference to June 2013 qs limni co ( bpp kit qs 5)
The d part ..how does share buy back scheme is more beneficial to shareholders than dividend
I am trying to understand concept that if shareholders sell their shares in the company ..the co is buying back so these shareholders who sell the right to dividend in future so how it is more Beneficial ..isn’t the dividend scheme more better
Also I read in answer that there is large tax liability on dividend ..but up till now I had the concept that there is no tax on dividend..!Isn’t it??
With a share buy back, the companies buys back shares and cancels them.
So there are then fewer shares in issue, still sharing the same total earnings, so the market value of the remaining shares in issue will be higher. So the shareholders will have received cash and the value of their remaining shares is higher per share.
The answer does not say that there is a large tax liability on dividends – it says that there may be. You are not expected to know the tax rules for dividends, but depending on the rules it could make a difference to whether they prefer receiving a dividend or prefer getting cash via a buy back.
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