Question

Which of the following would not be an appropriate reason for a firm to repurchase its stock:

1. As an investment if management believes the market has undervalued the stock price.

2. In order to have sufficient shares to cover employee stock programs.

3. Solely to boost Earnings Per Share.

4. Both A and B.

Answer 1

Answer: "In order to have sufficient shares to cover employee stock programs", This is not an appropriate reason for a firm to repurchase its stock.

Stock Repurchase- This is a corporate action when a company buys back its own outstanding shares from the stock market. Company goes for stock repurchase because of the following reasons:

• When stock is undervalued then to boost the stock price.
• When company wants to provide stock buyback plan to shareholders.
• To boost Earning per share (EPS).
• To reduce the cost of capital

All are the reasons for buying back the shares but "Having sufficient shares to cover employee stock option" is not the correct reason for stock repurchase.