Impact of Dividend Increase and Share Buyback on Financial Ratios

Very Hard Dividends And Repurchases Impact On Financial Ratios

XYZ Corporation has consistently returned excess cash to its shareholders through both dividends and share repurchase programs. Recently, the company's Board of Directors announced a plan to increase the annual dividend payout while simultaneously instituting a significant share buyback program. As a result, analysts are evaluating the impact of these financial strategies on XYZ's key financial ratios.

Three key financial ratios are often assessed in light of changes in dividends and repurchases: the price-to-earnings (P/E) ratio, the return on equity (ROE), and the dividend yield. Given these considerations, which of the following statements correctly describes the expected impact on at least one of these ratios as a result of the announced dividend increase and share buyback?

The increase in dividends will likely decrease the dividend yield, while the share repurchase will improve the P/E ratio.

Both the dividend increase and share repurchase will decrease the return on equity (ROE) due to higher equity base without a proportional increase in net income.

The share repurchase will likely increase the P/E ratio, while the dividend increase will have no effect on the dividend yield.

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