What are the two main ways companies can return cash to their shareholders?

What are the two main ways companies can return cash to their shareholders?

• A. Stock options and cash dividends
• B. Cash dividends and stock repurchase
• C. Bond issuance and cash dividends
• D. Equity raise and stock repurchase

Answer: (B)

The two main ways companies can return cash to their shareholders are cash dividends and stock repurchase. Cash dividends involve the direct payment of cash to shareholders, typically on a regular basis, providing them with immediate income. This method is straightforward and signals to shareholders that the company is generating sufficient profits and cash flow. Stock repurchase, also known as share buybacks, allows a company to buy back its own shares from the marketplace. This reduces the number of shares outstanding, which can increase the earnings per share (EPS) and potentially the stock price, benefiting shareholders indirectly. It can also be viewed as a way to return excess cash to shareholders when the company believes its shares are undervalued. These methods are preferred by companies as they provide flexibility in how returns are managed, depending on the firm's financial strategy and market conditions. Options such as stock options and bond issuance do not directly reflect cash returns to shareholders, and equity raises typically involve issuing new shares rather than returning cash. Therefore, the combination of cash dividends and stock repurchase succinctly captures the primary methods for returning cash to shareholders.

The two main ways companies can return cash to their shareholders are cash dividends and stock repurchase.

Cash dividends involve the direct payment of cash to shareholders, typically on a regular basis, providing them with immediate income. This method is straightforward and signals to shareholders that the company is generating sufficient profits and cash flow.

Stock repurchase, also known as share buybacks, allows a company to buy back its own shares from the marketplace. This reduces the number of shares outstanding, which can increase the earnings per share (EPS) and potentially the stock price, benefiting shareholders indirectly. It can also be viewed as a way to return excess cash to shareholders when the company believes its shares are undervalued.

These methods are preferred by companies as they provide flexibility in how returns are managed, depending on the firm's financial strategy and market conditions. Options such as stock options and bond issuance do not directly reflect cash returns to shareholders, and equity raises typically involve issuing new shares rather than returning cash. Therefore, the combination of cash dividends and stock repurchase succinctly captures the primary methods for returning cash to shareholders.