Question

Do stock buybacks create shareholder value? Explain from a residual operating earnings (ReOI) perspective?

Answer 1

Stock buyback means buying back shares from existing shareholder at a market price which will eventually explains upcoming profit is going to be shared by new existing shareholder - (i.e) which will have higher EPS for existing new shareholder.

From residual operating earnings perspective - Once buyback is done - Cost of Capital will be reduced such as Dividend.This will lead to increase in higher economic benefits for existing shareholder. This scenario will happen only when organisation has excess capital & their long term debt are Nil. Otherwise company can repay their debt instead of buying back their shares.