Which of the following is/are advantages of stock repurchases?
I. Stock repurchases increase the price per share by reducing the number of shares.
II. Stock repurchases are often viewed as a positive signal by investors, raising the intrinsic value of each share and increasing shareholder value.
III. Stock repurchases allow firms to distribute funds to shareholders without raising "sticky" dividends.
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A. B. C. D. E. F. G.B
The value of a stock repurchase does not come from a simple reduction in the number of shares outstanding. Remember that for this reduction, the firm must pay out part of its assets in the buy-back process. If such a buyback takes place at a fair price, the shareholder value is completely unaffected, for all you have done is exchanged cash for an equivalent value of common stock. The real wealth increase through a repurchase program arises from real and tangible effects like the interpretation of the program as a positive signal about future prospects. Further, if the management thinks that excess cash reserves are only temporary, then they would be reluctant to raise dividends and add instability to dividend policy. Repurchase programs allow them to distribute excess funds without paying them as dividends.