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TABLE OF CONTENTS 1. Introduction 1 2. Theoretical base (MM) 2 3. Analysis of sub questions 3 3.1 Source of funds 3 3.2 Motives for payment 4 3.2.1 Free cash flow theory 4 3.2.2 Signaling theory 4 3.2.3 Other theories 5 3.3 Investors' reactions 6 3.4 Managers' perspective 7 4. Comparison of literature / Evaluation of sub questions 7 4.1 Source of funds 8 4.2 Motives for payment 8 4.3 Investors' reactions 9 4.4 Managers' perspective 9 5. Synthesis 9 5.1 Definition of subsitutes 9 5.2 Answering of problem statement 10 6. Conclusion 10 7. Reference list 12 Appendix A - Decision making trees 15 1. INTRODUCTION Traditionally, most companies used to make payments to their shareholders in the most direct form - dividends. In the last decades however, an alternative option to transfer wealth to shareholders has gained increasing importance. Firms repurchase their own shares, thereby diminishing the number of shares outstanding which in turn increases the stock price. However, there are widely differing views as to whether both payout methods can be as substitutes or whether there are significant...

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