2.

Forms of Payout & Process

As mentioned above, there are two methods for firm to pay out cash to
shareholders which
are paying dividend or buying back some of the outstanding shares.
The former is called
2

dividend and the latter is known as share repurchase. As defined on

Investopedia, dividend
is a distribution of a portion of a company's earnings, decided by the
board of directors, to
a class of its shareholders. A dividend is allocated as a fixed amount
per share, with
shareholders receiving a dividend in proportion to their shareholding.
Meanwhile, as cited
in Knapp (2008), share repurchase (or buyback) is the process aiming
to reward
shareholders by taking some of the shares of company out of
circulation.
Before looking further at the choice between dividends and stock
repurchases, we need to
review how these payments to shareholders take place. A companys
dividend is set by the
board of directors. A dividend is distributable to shareholders of record
on a specific date.
When a dividend has been declared, it becomes a liability of the firm
and cannot be easily
rescinded by the corporation. The amount of the dividend is expressed
as dollars per share
(dividend per share), as a percentage of the market price (dividend
yield), or as a percentage
of earnings per share (dividend payout) (Ross et al, 2009). The
announcement of the
dividend states that the payment will be made to all stockholders who
are registered on a
particular record date. Then a week or so later dividend checks are
mailed to stockholders.
Stocks are normally bought or sold with dividend (or cum dividend)

until two business

days before the record date, and then they trade ex dividend. If one
buys stock on the exdividend date, his purchases will not be entered
on the companys books before the record
date and he will not be entitled to the dividend (Brealey et al, 2010).
Instead of paying a dividend to its stockholders, the firm can use the
cash to repurchase
stock. The reacquired shares are kept in the companys treasury and
may be resold if the
company needs money. There are four main ways to repurchase stock.
By far the most
common method is for the firm to announce that it plans to buy its
stock in the open market,
just like any other investor. However, companies sometimes use a
tender offer where they
offer to buy back a stated number of shares at a fixed price, which is
typically set at about
20% above the current market level. Shareholders can then choose
whether to accept this
offer. A third procedure is to employ a Dutch auction. In this case the
firm states a series
of price at which it is prepared to repurchase stock. Shareholders
submit offers declaring
how many shares they wish to sell at each price and the company
calculates the lowest
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price at which it can buy the desired number of shares. Finally,

repurchase sometimes takes
place by direct negotiation with a major shareholder (Brealey et al,
2010).