Impact on ROE from Dividends vs. Share Repurchase

Medium Dividends And Repurchases Impact On Financial Ratios

ABC Corp. is considering a significant change to its capital distribution policy. The company's Board of Directors is debating between increasing the dividend payout by 20% or repurchasing shares worth 10% of its market capitalization. Understanding how these actions will affect financial ratios is crucial for making an informed decision.

The company's current financials show a net income of $5 million, total assets of $50 million, and total equity of $25 million. Currently, ABC Corp. has a dividend payout ratio of 40%.

What will be the impact on the company’s return on equity (ROE) ratio if they decide to implement the increased dividend compared to the share repurchase?

The ROE will increase more with the dividend increase than with the share repurchase.

The ROE will remain unchanged whether the company increases the dividend or repurchases shares.

The ROE will increase more with the share repurchase than with the dividend increase.

Hint

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