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CHAPTER 23
BEYOND CASH DIVIDENDS: BUYBACKS, SPIN OFFS AND
DIVESTITURES
Shares of stock in a firm give their holders equal claims on all of the assets of the
firm, after the firm has met its debt obligations. Thus, the value of a share in Boeing or the
Home Depot is determined by three variables – the value of the assets in these firms, the
value of debt claims against them and the number of shares outstanding. There are several
ways in which a firm can change this value per share. Investment decisions can alter the
value of the assets by changing the expected cash flows. Changing the financial mix can
alter asset value (by changing the cost of capital), the value of debt, and the number of
shares outstanding. Dividend decisions affect the value per share by reducing the firm’s
assets (with the payment of cash).
In this chapter, we consider other ways in which firms can affect their value per
share. We begin with stock buybacks; like dividends, stock buybacks reduce the value of a
firm’s assets, but unlike dividends, they reduce the number of shares outstanding. While
we presented evidence on the magnitude of stock buybacks in the last chapter, we consider
the choice between dividends and stock buybacks in this one. When should a firm opt to
buy back stock rather than increase dividends, or in the more extreme scenario, replace
dividend payments with a stock buyback program? We also look at a variant of stock
buybacks, where firms enter into forward contracts to buy stock in future periods.
We next consider stock dividends and splits, actions that change the number of
shares outstanding without altering the value of the underlying assets. We look at why
firms may split their stock or pay stock dividends, and how markets react to these actions.
Finally, we consider actions that change the nature of a stockholders’ claims on a
firm’s assets. We begin with divestitures, where firms sell some of their assets to another
firm or entity; divestitures are often followed either by stock buybacks or special dividends.
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