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Represents the best investment available to the firm

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Question: The following reasons have been given as to why a firm may want to repurchase its own shares:

(a) Repurchase represents the best investment available to the firm.

(b) The firm repurchases shares to alter its capital structure.

(c) The firm repurchases shares in order to have stock available for general corporate purposes such as future acquisitions, stock options, and the like.

(d) Shares are repurchased to substitute capital gains for dividends as this may minimize taxes on investment income to be paid by shareholders.

(e) Share repurchases may improve the firm's financial performance indicators such as earnings per share. This may have a positive impact on share prices and, hence, increase shareholder wealth.

(f) Share repurchases by the firm create demand for the firm's shares and, hence, may provide price support. At the same time, it "signals" to investors that management believes the shares are a good investment. Based on management's superior knowledge of the firm, this may result in an appreciation of share prices. Briefly discuss the merits of each of these reasons. Which ones do you think are valid justifications for initiating a share repurchase program?

Reference no: EM131750360

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