Advantages of stock repurchase, Finance Basics

Advantages of Stock Repurchase

1. It may be seen as a true signal since repurchase may be motivated with management belief that firm's shares are undervalued. It is true in inefficient markets.

2. Employment of idle funds

Companies, such have accumulated cash balances in excess of future investments, might find share reinvestment scheme, to shareholders a fair method of returning cash. Continuing to carry excess cash may prompt management to invest unwisely since a means of using excess cash.

Example

A firm may invest additional cash in an expensive acquisition, transferring value to another group of shareholders completely. Means there is a tendency for more mature firms to continue along with investment plan even while E (K) is lower quite than cost of capital.

3. Enhanced dividends and E.P.S.

Following a stock repurchases, the number of shares mattered would reduce and thus in normal circumstances both E.P.S. and D.P.S. would rise in future. The increase however, in E.P.S is a bookkeeping increase as total earnings keep like constant.

4. Enhanced Share Price

Companies that undertake share repurchase, experience an increase in market price of the shares. This is partly explained with increase in total earnings having less and/or market signal effect that shares are under value.

5. Capital structure

A company's managers may use a share requirements or buyback, as a means of accurate what they perceive to be an unbalanced capital structure. Whether shares are repurchased from cash reserves, equity would be decreased and gearing increased or supposing debt exists in the capital structure. Alternatively a company may elevate debt to finance a repurchase. With debt replacing equity can decrease overall cost of capital because of tax advantage of debt.

6. Employee incentive schemes

As an alternative of cancelling all shares repurchase, a firm can retain several of the shares for staff of employee share option or profit sharing plans.

7. Reduced takeover threat

Shares repurchase decreased number of share in operation and number of 'weak shareholders' also that is shareholders along with no strong loyalty to company as repurchase would contain them to sell. This facilitates to reduce threat of a hostile takeover since it makes it difficult for Predator Company to get control. As such is referred like a poison pill that is Co.'s value is reduced as of high repurchase price, as huge cash outflow or borrowing huge long term debt to raise gearing.

Posted Date: 1/31/2013 2:49:07 AM | Location : United States







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