Question

What are some reasons that a company may repurchase its own stock and what effect does the purchase of treasury stock have on the equity of a company?

Answer 1

The following are reason company buyback its own shares:

1. Company mostly announce buy back when it can use its excess cash to buy its own shares from market.

2. Share price increases when buyback is announced.

3. Company announces buyback when it thinks that there stock is undervalued, so that they can buy at less value and later issue it back when market is correct or there stocks valuation is correct.

4. Company's EPS is increased after buyback, so it becomes more attractive to investors.

After buyback, the number of shares company has repurchased is reduced from the Equity capital of company. So the number of shares outstanding is now reduced.