Problem:

Shareholders of some companies occasionally complain about the huge cash reserves the companies accumulate. And, sometimes (Wal-Mart in 2007, Apple in 2013) firms indeed satisfy investor concerns - and announce plans to distribute substantial portions of cash holdings to the shareholders. This is typically done through simultaneous (i) increases in dividends per share, and (ii) initiations of substantial shock buyback programs.

Required:

Question 1: What are benefits vs. drawbacks of (large) cash reserves, describe why the reductions of cash reserves may be considered beneficial for company's investors.

Question 2: Why do you think companies tend to announce BOTH the dividend increase and share buyback? That is, discuss the relative advantages of distributing cash through dividends vs. share repurchases.

Note: Explain the solution in detail.