Question

Bernie Sanders advocated heavily against share buybacks, calling for a regulation that would restrict them in...

Bernie Sanders advocated heavily against share buybacks, calling for a regulation that would restrict them in the United States. Which of the following are most likely to be targeted for a share repurchase ban/restriction?

a.

Over levered (too much debt) firms, with few good investment opportunities.

b.

Over levered (too much debt) firms, with many good investment opportunities.

c.

Under levered (too little debt) firms, with many good investment opportunities.

d.

Under levered (too little debt) firms, with few good investment opportunities.

Please explain, answer d) Under levered (too little debt) firms, with few good investment opportunities. is INCORRECT

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Answer #1

ANSWER - D (Under levered (too little debt) firms, with few good investment opportunities.)

Explanation.- Share repurchase is the practice of buying back a company's shares from the public to reduce the number of outstanding shares.Share repurchase is the practice of buying back a company's shares from the public to reduce the number of outstanding shares.Share Repurchase is done with use of debt. As a result, the leverage of firms enagaged in buyback will be high.Since share repurchase involves cash outlay on part of the firm, it means that such firms have few good investment opportunities as they are using surplus cash to buy back stock rather than invest in potential return generating projects.Hence, regulations will target under leveraged companies with few investment opportunities to restrict share repurchases.

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