Question

Q. Assuming the suppliers of financial capital (shareholders or bond/debt holders) are concerned at the level of buybacks (be it they view companies returning capital too quickly or too slowing through stock buybacks). How would this affect the cost of capital for a business? This one can be a little tricky. You have to think about what the cost of capital is, how it is determined, how any issue affects the cost of money.

Answer 1

Cost of capital is the return that investors (both stock holders and bond holders) expect from the business in return for the investment made by them in the business.

A high level of stock buyback would mean the capital is returned to them too quickly and without an adequate chance for appreciation of capital. While a slower return would imply that the capital is not returned in time and this would also mean a demand for higher return from the investors. In both these scenarios, to get the expected return, the capital returned to the investors should be higher than what is happening in reality.

Thus with less or more than optimal capital returning, the cost of capital is expected to change for the company and should go higher to appeal to the investors and get their monies.