Dividends and Stock Repurchases

The case presents interesting developments experienced in the contents of the proposal made by Freeman Plumbing Supplies’ CEO. The CEO’s proposal to have a Dividend Reinvestment Plan (DRIP) passed on to Ed Davidson, a highly experienced finance manager, from a technical point of view is seen as a scheme to have the top executives access more benefits from the company. This is attained through the change of policy in taxation of the benefits acquires through dividends and additional stocks acquired by the top executives. Ed’s discovery raises questions on the significance of DRIP to the shareholders and the company.

It is essential for Ed to determine the potential benefits the program has on the company and the shareholders. The responsibility to evaluate the problem should not be biased due to its potential of increasing benefits for the top executives. However, in the determination of the fact that the program has extensive potential benefits to the company and the shareholders should be the guiding principle of approving the proposal. The primary threshold stock reinvestment plan where cash dividends is used to purchase additional shares or stock split should be used as basis for the approval of the proposal (Berkman & Koch, 2017).

The stock split where multiple shares are used to increase the profits for the company and in turn for the shareholders is vital to the realization of the DRIP objective. Whether the top executives are bound to benefit more from the program or not should not inform the decision rather the potential of the initiative to create additional benefits for the company and the shareholders as well. Furthermore, the additional benefits to the top executive can be used as an impetus used to drive high performance, creativity, and innovativeness in the company.

References

Berkman, H., & Koch, P. D. (2017). DRIPs and the dividend pay date effect. Journal of Financial and Quantitative Analysis52(4), 1765-1795.

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