4 When a firm buys back stock, what happens to the number of shares outstanding?

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Expert Solution

When a firm buys back stock, the number of shares outstanding gets reduced by the number of shares gets buy backed. Buy back of stock refers to Purchasing back stock of the company from the investor, in this way the company return the money to the investors. The buy back helps the company to reduce the cost that is associated to the stocks which helps them to improve the cash flow of the company and try to make compamny balance sheet more stronger.

In this way, when the company purchase the stock the Earning per share (EPS) of the stock gets stronger, as the cash flow of the company will be distributed among less shareholder, this will also enhance the company stock value which will increase the price earning ratio and return on equity.

Example : Total Shares outstanding before Buyback - 10,000

Buy back of Shares - 2,000

So, The new outstanding shares will be =10,000 -2,000

which is 8,000.

jeff jeffy answered 1 year ago

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