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In financial statement analysis, a UK listed company announced that it would buy back as much...

In financial statement analysis, a UK listed company announced that it would buy back as much as 45% of its shares, with the repurchase being financed by new borrowings. Why do firms repurchase stock? In respect of the above case discuss what the likely effect the repurchase will have on earnings per share and earnings per share growth. Will the repurchase add value to shareholders, and why?

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Answer #1

Repurchase mean company is taking back the stock issued earlier to the public. It generally happen when company does not require funds or it has excess fund. Repurchase will reduce the share outstanding with the stockholder therefore Earning per share will increase.

However repurchasing by having new borrowing is a bad idea. New borrowing will increase the interest expenses. Increased operting cost will reduce the profit available for equity shareholder. EPS will go down.

There are companies who switch to this method and created value for shareholder but that requires proper implementation along with financial analysis.

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