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Questions and Answers
Which of the following is a potential disadvantage of a share repurchase (buyback) by a company?
If a company has a net income of $100 million and pays out $20 million in dividends, what is its dividend payout ratio?
What is the retention ratio of a company that has a dividend payout ratio of 30%?
Which of the following statements is true about a share repurchase (buyback) by a company?
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If a company's dividend payout ratio increases, what happens to its retention ratio?
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How does a company's share repurchase (buyback) typically affect the stock price?
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Which of the following is a potential disadvantage of a share repurchase during an economic downturn?
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If a company has a net income of $100 million and pays out $20 million in dividends, what is its dividend payout ratio?
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If a company's dividend payout ratio increases, what happens to its retention ratio?
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How does a share repurchase (buyback) typically affect a company's earnings per share (EPS)?
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What is the retention ratio of a company that has a dividend payout ratio of 30%?
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How can a share repurchase (buyback) make a company's stock more attractive to potential investors?
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Which of the following is a potential consequence of a company's share repurchase (buyback) being perceived as ill-timed by the market?
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How can a share repurchase (buyback) create challenges for a company during an economic downturn?
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If a company has a net income of $100 million and pays out $20 million in dividends, what is the company's retention ratio?
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Study Notes
Dividend Payout Ratio
- Dividend Payout Ratio (DPR) measures the percentage of net income distributed to shareholders in the form of dividends
- Formula: Dividend Payout Ratio = Dividends Paid / Net Income
- Alternatively, DPR = 1 - Retention Ratio
- A high DPR indicates a large portion of earnings is distributed to shareholders, leaving less for reinvestment
- A low DPR suggests the company is retaining more earnings for growth opportunities or building reserves
- Important for investors to assess sustainability of dividend payments and overall financial health
Share Repurchase
- A share repurchase is a transaction where a company buys back its own shares from the marketplace
- Reasons for repurchase: reducing cost of capital, ownership consolidation, preserving stock prices, undervaluation, and boosting financial ratios
- Repurchases reduce the number of outstanding shares, which can drive up share prices
- Pros: shows company believes shares are undervalued, increases share value, and makes stock more attractive to investors
- Cons: can be ill-timed, may lead to price drop, and create challenges during economic downturn
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Description
Understand the concept of Dividend Payout Ratio (DPR) and how it relates to the total net income generated by a company. Learn how to calculate the dividend payout ratio using the formula involving yearly dividend per share and earnings per share (EPS).
