Financial Management: Principles and Applications, 13/e

16.1 How Do Firms Distribute Cash to Their Shareholders?

Cash distributions by a firm to its stockholders can take one of two basic forms: a cash dividend or a share repurchase. With a cash dividend, the firm pays the cash directly to shareholders. With a share or stock repurchase, it uses the cash to buy back its own shares from the marketplace, thereby reducing the number of outstanding shares. In either case, cash is transferred from the company to the firm’s stockholders. Looking at the impact of a cash distribution on the balance sheet, the cash account goes down as the cash is either sent to the shareholders in the form of dividends or used to buy back stock, and on the right-hand side of the balance sheet, there is a corresponding decrease ...