Critical Thinking on the Dividend Policy

Question 1: As per Session 7: Share repurchases do not increase long term value for the shareholders since cash leaves the company and no additional money is placed on investments. It creates a short-term increase in the stock price, usually not related to value. If this is true, why does Mr Buffett repurchase stock?

Mr Buffett repurchases stock since he avoids getting his company, Berkshire from entering into a commitment for the long run. This is because with the unpredictable future and changes that take place in an organization at every financial period, it is unrealistic to make pledges. Mr Buffett also uses it as a safety precaution. This is because the stock repurchase covers the deteriorating conditions that take place in any organization (Tirole, 2010 p44). In addition, it is also a way to replace the equity with debt. Further, it allows the company have enough cash they can use to make a transformation in the capital structure (Parrino et al., 2011 p77). The fact that stocks repurchase above the market price affects the return on investment positively is also a driving force as why Mr Buffett capitalizes on it.

Question 2: Search and comment on a company that Mr Buffett has acquired through a stock repurchase event

Mr Buffett acquired Washington Post Company through a repurchase, which is still one of their biggest holdings to this day. Mr Buffett exemplified the use of considering stock, which is considered part of ownership in all types of businesses while maximizing on the fluctuations taking place in the market. Further, it is also important to make use of the margin of safety and invest while in that bracket.

Question 3: What is TSR (Total Shareholder Return)?

Total Shareholder Return is the total of dividends and capital appreciation. It measures the performance of the shares and stocks of a company over different periods through combining the dividends paid out with the price appreciation during that period (Flannery et al., 2013 p17). Through this, it is possible to evaluate the returns to a shareholder on request. It is shown as a percentage.

Question 4: Name three companies that pay dividend and three that do not

Some of the companies that pay dividend include Caterpillar famously known as CAT, Seagate Technology (STX), and Kinder Morgan (KMI). One of their major arguments is that they want to retain the investors who have keyed in large amounts of finances in the firms (Ross et al., 2008 p100). Some companies that deliberately choose not to pay the dividends to their investors include Amazon.com Inc., Level 3 Communications, and Ebay Inc. their argument is that they would rather plough back the profits to the business as a way to expand the organizations (Hillier et al., 2013 p56).

Reference List

Flannery, M.J. and Hankins, K.W., 2013. Estimating dynamic panel models in corporate finance. Journal of Corporate Finance, 19, pp.1-19.Hillier, D., Ross, S., Westerfield, R., Jaffe, J. and Jordan, B., 2013. Corporate finance. McGraw Hill, pp.23-67.Parrino, R., Kidwell, D.S. and Bates, T., 2011. Fundamentals of corporate finance. John Wiley & Sons, pp. 56-78.

Ross, S.A., Westerfield, R. and Jordan, B.D., 2008. Fundamentals of corporate finance. Tata McGraw-Hill Education, pp.99-107.Tirole, J., 2010. The theory of corporate finance. Princeton University Press, pp.34-66.