| Course | IBF-5040 Corporate and Managerial Finance |
|---|---|
| Module | Module 8 |
| Paper type | Module 8 written assignment: current issues in finance |
| Length | About 555 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | MBA in Finance |
| Updated | October 2026 |
Free sample paper for IBF 5040 Module 8
Buybacks After the Excise Tax: Payout Policy as a Current Issue in Finance
Student Name
MBA in Finance, Thomas Edison State University
IBF-5040: Corporate and Managerial Finance
Mentor Name
Month Day, Year
Buybacks After the Excise Tax: Payout Policy as a Current Issue in Finance
Introduction
Over recent decades, U.S. companies have returned more cash to shareholders through repurchases than through dividends in many years. Fama and French (2001) documented a sharp decline in the share of firms paying dividends from the late 1970s, and Grullon and Michaely (2002) found that repurchases grew partly as a substitute for dividends. In 2022 Congress added a 1 percent excise tax on the net value of stock repurchased by public companies, effective for repurchases after December 31, 2022, reigniting a debate over whether buybacks serve investors or managers. The activist's demand at Passaic brings the debate to the course's company.
Why Firms Repurchase
In the survey by Brav et al. (2005), executives saw dividends as a promise they hate to cut and buybacks as a flexible tool for spare cash or a share price they think is too low. Repurchases can signal managers' confidence, return excess cash that might otherwise be wasted, an agency argument, and offset dilution from employee stock awards. Critics argue that buybacks can be timed to raise earnings per share and executive pay, and that they divert cash from investment. Research also finds that announcement returns for buyback programs are positive on average, suggesting investors often read them as good news, although the effect varies with the firm's circumstances.
The Excise Tax
The 1 percent tax raises the cost of repurchases slightly but is small relative to the personal tax differences between dividends and buybacks; shareholders who do not sell pay no tax on a buyback, while dividends are taxed when paid. Early evidence suggests the tax has not changed aggregate repurchase activity much. For Passaic, a $30 million buyback would cost an additional $300,000 in tax. The tax is assessed on repurchases net of new shares issued during the year, so firms that issue stock to employees pay tax only on the excess.
The Proposal in Numbers
At about $14 a share, $30 million would retire about 2.14 million of Passaic's 20 million shares. If financed with debt at 7.2 percent, after-tax interest of about $1.7 million would reduce net income from $36.3 million to about $34.6 million, but earnings per share would rise from $1.82 to about $1.94, roughly 6.6 percent, because the share count falls faster than income. The increase reflects more debt, not better operations, and earlier modules found that the company's debt is already near its covenant limits and that the shares do not appear undervalued.
Recommendation
Passaic should not borrow for a large buyback. It should fund the automated machining cell, which has a positive NPV, reduce debt toward the target structure from Module 6 and adopt a policy of modest repurchases funded only from free cash flow after investment, sized to offset dilution from employee stock awards. The dividend should be maintained, since cutting it would send a negative signal, and the board should explain the policy to shareholders, including the activist, in terms of long-run value.
Conclusion
Repurchases are now central to payout policy, and the 1 percent excise tax has not changed their basic appeal. For Passaic, a debt-financed buyback would raise earnings per share through borrowing while adding risk and displacing a value-creating investment. A smaller, cash-funded program within a clear payout policy serves shareholders better.
References
Brav, A., Graham, J. R., Harvey, C. R., & Michaely, R. (2005). Payout policy in the 21st century. Journal of Financial Economics, 77(3), 483-527. https://doi.org/10.1016/j.jfineco.2004.07.004
Fama, E. F., & French, K. R. (2001). Disappearing dividends: Changing firm characteristics or lower propensity to pay? Journal of Financial Economics, 60(1), 3-43. https://doi.org/10.1016/S0304-405X(01)00038-1
Grullon, G., & Michaely, R. (2002). Dividends, share repurchases, and the substitution hypothesis. Journal of Finance, 57(4), 1649-1684. https://doi.org/10.1111/1540-6261.00474
IBF 5040 Module 8 instructions, in plain terms
The eighth IBF-5040 written assignment asks you to examine a current issue in finance and apply the course's concepts to it. Topics vary by term and may include payout policy, sustainable finance, interest rate changes, fintech or regulation. Expect to explain the issue, review evidence on it and apply it to a company or decision. Choose an issue on which research and recent data exist, and use the tools from earlier modules, such as valuation and cost of capital, rather than writing a general essay. Cite current sources for any policy change. Organize the paper around a question the issue raises, such as whether a policy creates value, and answer it with evidence and calculation. Recent data from government or industry sources can show the size of the trend. Close with a recommendation that draws on what you learned across the course, so the final assignment shows how its parts fit together.
Inside the IBF 5040 Module 8 example
The paper introduces the long shift from dividends to repurchases and the recent excise tax, with research on both. A section uses survey evidence to explain why firms repurchase and what critics argue. A section evaluates the tax's likely effect. A numerical section calculates the buyback's effect on shares, net income and earnings per share, showing that the gain comes from borrowing. The recommendation draws together findings from every earlier module into a payout policy for the company. The research appears where it supports a specific claim, and each section moves the argument forward. The numbers are shown step by step, so a reader can see how the share count and net income change. The paper ends with a payout policy that responds to each finding from earlier modules, turning a current debate into a decision for one company and closing the course's running case.
Where the marks sit in the IBF 5040 Module 8 rubric
Mentors grade this assignment on accurate explanation of the issue, use of current evidence, application of course tools and a reasoned conclusion. Answers that analyze a real decision with numbers, and that recognize evidence on both sides of the debate, show depth. Integrating earlier modules, such as capital structure and valuation, into the conclusion demonstrates mastery of the course. Accurate details about recent policy changes add credibility. Papers that distinguish between the accounting effect of a policy and its effect on value, and that support that distinction with numbers, show the analytical skill the course aims to build. Presenting both the case for buybacks and the criticism of them, with evidence for each, demonstrates balance. A clear, specific recommendation completes the assignment and shows the student can advise a board.
IBF 5040 Module 8 help from the desk
Students lose points by describing a current issue without analysis, by relying on news commentary instead of research or by misstating policy details. Others treat an EPS increase as proof that a buyback creates value. Explain the issue with evidence. Apply course tools to a decision. Separate EPS effects from value effects. Check dates and amounts for any law or regulation you cite. Some also present only one side of a debate, which reads as advocacy rather than analysis. Give each side its best case and its evidence. Show the arithmetic for any figure you use. Write the advice so a board could vote on it, and show how it fits the firm's capital needs. A free first sample on your own IBF-5040 Module 8 topic is available on request.
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IBF 5040 Module 8 questions, answered
Where can I find a free IBF 5040 Module 8 sample paper?
Buybacks, the 1 percent excise tax and Passaic's payout choice are examined above.
What is the stock buyback excise tax?
A 1 percent federal tax on the net value of shares repurchased by public companies, effective for repurchases after 2022.
Why do companies prefer buybacks to dividends?
Buybacks are flexible and can be timed, while dividends are seen as a commitment that is costly to cut.
Does a buyback that raises EPS create value?
Not necessarily; EPS can rise through added debt while risk also rises, so value depends on price paid and financing.
What happened to dividend payers over time?
From the late 1970s, far fewer U.S. firms paid dividends while buybacks spread, as Fama and French documented.