Question

Discuss various reasons why a company might choose to buy back its own stock. What do you think of this strategy?

What are potential risks and benefits for the company?

Answer 1

Stock buyback refers to the repurchasing of shares of stock by the company that issued them.

Reasons for buyback

Since companies raise equity capital through the sale of common and preferred shares, it may seem counter-intuitive that a business might choose to give that money back. However, they are numerous reasons why it may be beneficial to the company to repurchase it's shares, including ownership consolidation, undervaluation, and boosting it's key financial ratios.

Benefits

1. Rise in stock price from share buyback program.

2. Prevents companies from hoarding cash.

3. Share buyback give companies other options.

Risks.

1. Share buybacks are a sign of lack of future growth.

2. Companies do not have to abide by buyback announcement.

3. Share buyback put companies at risk.