1. ABC Pcl in 2008 reaffirmed with its shareholders that the company will pay at least 50 percent of its net income as dividend. In the meeting, the company also announced a plan to invest about 500 million baht to build a new factory to boost production capacity as overseas orders for its products rise. The company insisted the new investment won’t affect its planned dividend payment because of a global economic recovery.
In February 2009, the company announced its net income in 2008 rose 60 percent to 300 million baht. The profit was in line with the company’s and analysts’ estimate. Despite higher earnings, the company announced it will omit the dividend payment for the 2008 operation. The company said it needs to reserve cash flow to fund the construction of new factory.
With this information, what will ABC’s share price be after the announcement to scrap dividend payment? Please use the financial theories to explain your answer.
2. U.S. companies spent a record $172 billion to buy back their own shares in the July-September quarter of 2007 even as earnings declined for the first time in five years.
S&P 500 companies increased buyback spending 57 percent from a year earlier. Buybacks tend to reduce the number of outstanding stock, thus increasing earnings per share.
Economists found “no convincing evidence” to suggest that the buybacks increase the long-term value of the company. Pension funds have become main investments of U.S. companies in the past decade as they search for higher returns on investment than fixed-income securities.
On average, pension funds own about 50 percent of large companies in the S&P index as of June 30, 2007. That compared with less than 5 percent holdings 10 years ago. Pension funds have been exempted from capital gain tax.
Please explain whether stock repurchase increases shareholders’ value. How will the tax structure affect the companies’ decision to choose between share buyback and cash dividend.