Meso - Corporate finance and asset-pricing

6 important questions on Meso - Corporate finance and asset-pricing

Two schools on dividends

Bad
- double tax
- tax rate > capital gains

firms with individual investors should pay lower dividends

How do you buy back stocks

Repurchase tender offers
open market purchases
privately negotiated repurchases

Why do you buy back stocks

Return cash to shareholders who want to exit
increase earnings per share, all else equal
more tax-efficient than dividends
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Free cash flow theory

Negative relationship between buybacks and profitability
more repurchases = less need for cash
lower cost of capital
market reaction stronger for overinvesting firms

What are the characteristics of announcements

CAR related to several measures
ROE = return on equity divided by total equity
DIV = dividends paid

The debt trade off
benefits
costs

Benefits =
- tax advantage
- discipline

Costs =
- debt increases bankruptcy costs
- debt creates agency costs
- reduce financial flexibility

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