Question

In October 2016, Microsoft announced a $40 billion share buyback program. Why might shareholders prefer share buybacks to dividends? (Choose all that apply.)

A) Tax efficiency
B) Capital gains
C) Dividend tax rate
D) Control over personal income

Answer 1

Shareholders may prefer share buybacks to dividends due to tax efficiency, potential for capital gains, and control over personal income.

Step-by-step explanation:

Shareholders may prefer share buybacks to dividends for several reasons. One reason is tax efficiency. In some countries, capital gains from selling shares may be taxed at a lower rate than dividends, allowing shareholders to keep more of their returns. Another reason is the potential for capital gains. When a company buys back its own shares, it reduces the number of shares in circulation, which can increase the value of the remaining shares and potentially lead to higher capital gains for shareholders. Additionally, share buybacks give shareholders more control over personal income. By selling their own shares on the market, shareholders can choose when and how much income they receive, giving them more flexibility.