1. An article on stock repurchase in the Los Angeles Times noted: “An increasing number of companies are finding that the best investment they can make these days is in themselves.” Discuss this view. How is the desirability of repurchase affected by company prospects and the price of its stock?

2. Comment briefly on each of the following statements:

a. “Unlike American firms, which are always being pressured by their shareholders to increase dividends, Japanese companies pay out a much smaller proportion of earnings and so enjoy a lower cost of capital.”

b. “Unlike new capital, which needs a stream of new dividends to service it, retained earnings have zero cost.”

c. “If a company repurchases stock instead of paying a dividend, the number of shares falls and earnings per share rise. Thus stock repurchase must always be preferred to paying dividends.”