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Technology Stocks : Dell Technologies Inc.
DELL 121.11+0.4%12:24 PM EST
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To: Chuzzlewit who wrote (80401)11/15/1998 11:37:00 AM
From: BGR  Read Replies (1) of 176387
 
CTC,

This is what my understanding is. Please explain why this doesn't hold.

Assuming short term capital gains and dividends are taxed at approximately the same rate, let's analyze the difference between the cases when a firm deploys excess cash via (1) a cash dividend and (2) a stock buyback. Let's say that the dividend payout was 10% and the company had 100 shares to start with and the share price was 100. Now let's ignore taxes as they are the same in both cases.

In the first case, the share price drops to 90 (say) but the shareholder is compensated via the cash dividend of 10. Total company value is ex-dividend 9000 plus the shareholder has 1000 cash in hand.

In the second case, if the share price remains the same, the net company value is 9000 as now there are 90 shares. But the shareholder has no cash in hand. Therefore, to compensate the shareholder, the share prices need to rise to 111 approx. so that they can sell part of the total holdings to raise the cash.

Therefore, share prices should rise after a stock buyback.

As for debt, I am not sure that investors as a group can borrow at comparable rates as corporations. I do agree that excess leverage decreases company value.

MM II holds in a perfect capital market. My belief in perfect capital markets has been badly shaken over the last 1 1/2 years.

-Apratim.
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