Question

Q#2. After the severe 2008 stock market crash, an increasing number of publicly traded firms announced stock buyback (repurchase) programs. Most analysts are also predicting that many firms will use the money saved due to the 2018 tax law to repurchase their stock or pay dividends. Please explain what benefits or rationale, if any, firms see in stock repurchases and how would investors react to these repurchase programs. You would want to use your understanding of chapter 14 stock repurchase discussion in your answers. Limit your answers to no more than ten (10) sentences.

Answer 1

The benefits in stock repurchase are:
It injects more cash to the economy and the price per share increases and hence the existing shareholders get more benefit from it. It increases consumer confidence in the company. It helps in overcoming undervaluation of firms. It helps in reducing cost of capital of the firm. By increasing Eps it benefits the shareholders. It helps in utilising the excess cash generated due to tax cuts. The opportunity cost of using cash is very high and it is used in buying back share it helps in reducing cost of capital. It boosts the financial ratios and consolidates ownership.