Question

What are stock repurchases, and why are they used? What are the advantages and disadvantages of stock repurchases?

Answer 1

Answer-

Stock repurchases

A share repurchase refers to the buy back of company shares by management of a public company that were previously sold to the public. They are done with the intent to increase the stock price and increase the share of ownership of promoters. They can also be done to signal that the company has goodamount of cash.

Advantages

1) Repurchasing outstanding shares can reduce its cost of capital
2) The company can benefit from temporary undervaluation of the stock
3) Share repurchases can consolidate ownership
4) It signals that the company has good pile of cash
5) Stockholders can choose to sell or not to sell the shares unlike dividends.
6) Stock repurchases helps to avoid setting a high dividend that cannot be maintained.

Disadvantages

1) Stock buybacks made as open-market repurchases do not contribute to the productive capabilities of the firm.
2) It signals that there are less opportunities for the company too invest that will increase the value of the firm.