When announced stock repurchase, the Issuer intends to redeem all or part of the shares issued to raise capital. In exchange for giving up ownership in the company and periodic dividends, the shareholders pay the fair market value of the shares at the time of redemption.
The company may buy back shares for several reasons. Redemption of the placed shares may help the company to reduce the cost of capital, benefit from temporary undervaluation of shares, consolidation of ownership, inflate the important of financial performance or free up profits to pay Executive bonuses.
The most generous interpretation of the buyback of the company is that the business is doing very well financially and no longer need so much capital. Instead of having to bear the burden of unnecessary stock and payment of dividends, it requires investment, the company returns to shareholders, reducing its weighted average cost of capital. However, the purpose of the debt and equity capital to Finance growth.
So when the company voluntarily returns to his own capital, it may be a sign it is not a viable expansion projects in which it invests. Blue chip companies that have come to dominate their industries may redeem shares because there is little room left for growth, the provision of large reserves of capital unnecessary.
The buyback of the company do not necessarily mean that the issuing company ended uses for equity Finance. In fact, it can also be used as a strategic device aimed at getting more of the share capital without issuing any additional shares. If the company feels that its stock is undervalued, he can choose to redeem some or all of the outstanding shares at a deflated price and wait for market recovery. When the stock price moves back up, company can reissue the same number of shares at the new higher price, increasing the total capital, while keeping the number of outstanding shares is stable.
Stock buybacks are also used as a means of consolidation of ownership. Each share represents a small stake in the company. The smaller, the more people in the business, must meet. Fewer shares in circulation and an easier way to inflate a few important financial indicators used by analysts and investors to assess the enterprise value and growth potential. Earnings per share (EPS) ratio is automatically increased in the denominator is reduced. Similarly, return on equity (ROE) figure will benefit if the share capital is minimized, while revenues remain stable.
While it may be understandable that the company wants to concentrate control of the business in the hands of its core leadership, the truth is that the ransom is increasingly used as a way to boost Executive compensation. Shareholder dividends are paid from net profit of the company. If there are fewer shareholders, the proverbial pie is divided into fewer parts. In addition, a corporate bonus program based on the business achieving certain financial goals. Common tests include the increase in EPS and ROE, as mentioned above. The share buyback allows companies to increase Executive compensation, making the company more profitable.