Question

g "6. Financially, why would a company: (a) increase its dividend; (b) buy back some of its common stock shares; (c) pay down some of its debt; (d) increase its use of internal financing; (e) take the public firm private?"

Answer 1

(a) increase its dividend;

dividends are increased for two reasons:

1. the company has excess cash and it doesn't have any possible investments on hand
2. the board and upper management want to increase the stock price and higher dividends always result in higher stock prices, even if it is only in the short run.

(b) buy back some of its common stock shares;

• the company has excess cash and the board and upper management believe that the stock price is too low.

(c) pay down some of its debt;

• the company has excess cash and it considers that the cost of its debt is too high and it can get cheaper financing from other sources if needed.

(d) increase its use of internal financing;

• the board and upper management considers that the company needs to invest in new or existing projects and they consider that the financing costs are too high. Also, on the long run if things work well, the stock price should increase.

(e) take the public firm private

• the company has excess cash and the board and upper management believe that the stock price is too low. It is similar to (b) only on an extreme situation.