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1. Explain how the use of leverage can increase the shareholder’s wealth.

Leverage is known as using the company’s debt to increase total capital available as increase the potential return of an investment. If the debt is greater than equity, it will be called highly leveraged. The borrowing of debt to raise capital will add more risks but it can grow the shareholder’s wealth. The investors lever financial instruments to increase their buying power in the market. The company uses leverage to expand business operations to raise the shareholder’s value.

2. What are the advantages of stock repurchases versus paying dividends?

Stock repurchases:

– Flexibility for investors and company.

– A tax-efficient way to return capital to shareholder

– Investors can choose the timing of their share sales.

Paying dividends:

– Highly visible

– It’s easy to find information on media or through the networks.

– The companies have-to maintain capital structure to remind cash dividend for shareholders.

3. What is the difference between a stock dividend and a stock split?

A stock split occurs when a company wants to increase the number of shares and decreases the par value per share. For instance, a 2 for 1 stock split means the halve par value per share but double the number of shares. The stock split is used to decrease the stock price but the investor keeps existing proportion in the company. The stock split creates more opportunities for future investors to buy more stocks at an acceptable price range.

Stock dividend happens when the company purchases more common shares for the shareholder by using the amount of money that would be paid as a cash dividend. If a company wants to keep cash to operate the company, the stock dividend will be issued. Stock dividend keeps earnings in the company and makes it more valuable in the future.