As per my view the reasons can be;
1.With lesser capital it will increase their EPS(Basic and diluted)
2.The cost of equity funds are quite high,and hence it can reduce their cost considerably
3.The firm can leverage its position and can go for debt financing,which is a cheaper mode of finance
Please correct me if I m wrong or wasnt the exact reply of wat u asked,but I found a good way of just analysing this aspect so answered it.
Debasis
(MBA(Finance) student>>CS)
(86 Points)
Replied 17 August 2010
Thanks a lot.I got it. But what will be its effect on issued shares?
When a company buys its stock, the cash on its balance sheets reduce. This increases the return on the assets value. And further due to reduction in the outstanding shares in the market, the RoE value also increases.
Debasis
Rohit
([ ] )
(1140 Points)
Replied 17 August 2010
Well the motive behind buy-back of shares is not always the same, there are various reasons:
1. It is a way of returning cash/capital to shareholders. You can consider it as a form of special dividends. The reasons companies do it is to not change a stable or gradually increasing dividend policy and still pay back any excess capital.
This form is very popular in west among the businesses with cyclical nature...things like re-insurance and insurance.
2. Another reason is reduction of float, at times used in conjunction with other M&A defence mechanism
3. Another reason is supporting the share price. Post the buyback of shares the value of remaining shares' generally' goes up.
4. Needless to say it is EPS accretive.
5. Also buy-backs are used for play around the tax laws, assume capital gains are not taxable and dividend distributions are (this is different for each jurisdiction). Taxable, then instead of paying excess cash dividends; Companies prefer to buy back shares
Hope this helps
Debasis
(MBA(Finance) student>>CS)
(86 Points)
Replied 17 August 2010
the company cancels all the bought back shres or not?
SitaRamKiran
(Employee)
(133 Points)
Replied 18 August 2010
The company has to cancel the shares with in one week from the date they have been bought back.
Kalpesh Chauhan,
(Tax Assistant (Accounting Technician CA FINAL CS PROF. PROG. B.Com))
(8311 Points)
Replied 18 August 2010
| Originally posted by : Heena | ||
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As per my view the reasons can be; 1.With lesser capital it will increase their EPS(Basic and diluted) 2.The cost of equity funds are quite high,and hence it can reduce their cost considerably 3.The firm can leverage its position and can go for debt financing,which is a cheaper mode of finance Please correct me if I m wrong or wasnt the exact reply of wat u asked,but I found a good way of just analysing this aspect so answered it. |
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