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 when their prices are down or to share their enhanced earnings with shareholders 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

Share are repurchased with the objective to lock the fall in share by reducing the supply of the shares in market. Further When shares are reduce, the EPS will increase automatically and dividednd wil be high as same amount will be distributed to less share holders.Cash asset of the company are also reduced. Thus improving ROE. In 2008 stock market crash the above benefits were kept in mind , and to stop fall in share price buyback were announce.

Further buyback do not attract tax liability, thus instead of distributing high dividend , company prefer buyback.

On perspective of investors, investors will get premium over market price and the remaining shares will also rise, Thus buyback will have positive impact on shareholders