Repurchase

Examples of Repurchase in the following topics:

• Drawbacks of Repurchasing Shares

  • Share repurchases often give an advantage to insiders and can be used to manipulate financial metrics.
  • There are a number of drawbacks to share repurchases.
  • Both shareholders and the companies that are repurchasing the shares can be negatively affected.
  • Furthermore, share repurchases can be used to manipulate financial metrics.
  • Companies often announce repurchases and then fail to complete them, but repurchase completion rates increased after companies were forced to retroactively disclose their repurchase activity.

• Repurchasing Shares

  • An alternative to cash dividends is share repurchases.
  • This method is used for almost 75% of all repurchases.
  • Selective Buy-Backs: The firm makes repurchase offers privately to some shareholders.
  • Dutch Auction Self-Tender Repurchase: The company announces a range of prices at which they are willing to repurchase.
  • The company repurchases shares from all shareholders who stated a price at or below that repurchase price .

• Benefits of Repurchasing Shares

  • Share repurchases are beneficial when the stock is undervalued, management needs to meet a financial metric, or there is a takeover threat.
  • A company may seek to repurchase some of its outstanding shares for a number of reasons.
  • Repurchasing shares may also be a signal that the manager feels that the company's shares are undervalued.
  • To do this, the takeover target will repurchase its own shares from the unfriendly bidder, usually at a price well above market value.
  • Share repurchases are one way of lowering the amount of cash on the balance sheet.

• Repurchasing Stock

  • The reasons to repurchase stock can vary from company to company.
  • Another motive for stock repurchase is to protect the company against a takeover threat.
  • So, the net effect of the repurchase would be zero.
  • Consider a company that repurchases 15,000 shares of its $1 par value stock for $25 per share.
  • Public companies sometimes repurchase their own stock.

• Sinking Funds

  • The firm may repurchase a fraction of the outstanding bonds in the open market each year.
  • The firm may repurchase a fraction of outstanding bonds at a special call price associated with the sinking fund provision (they are callable bonds).
  • The firm has the option to repurchase the bonds at either the market price or the sinking fund price, whichever is lower.
  • The firm can only repurchase a limited fraction of the bond issue at the sinking fund price.
  • One purpose of a sinking fund is to repurchase outstanding bonds.

• The Common Financial Instruments

• Types of Stock Market Transactions

  • Types of stock market transactions include IPO, secondary market offerings, secondary markets, private placement, and stock repurchase.
  • Stock repurchase (or share buyback) is the reacquisition by a company of its own stock.
  • In some countries, including the U.S. and the UK, a corporation can repurchase its own stock by distributing cash to existing shareholders in exchange for a fraction of the company's outstanding equity; that is, cash is exchanged for a reduction in the number of shares outstanding.
  • The company either retires the repurchased shares or keeps them as treasury stock, available for re-issuance.
  • Firstly, some part of profits can be distributed to shareholders in the form of dividends or stock repurchases.

• Redeeming Before Maturity

  • For bond issuers, they can repurchase a bond at or before maturity.
  • It is notable that early repurchase happens more often when the interest rate in the market is on decline and when the bond contains an embedded option.
  • To be detailed, the bond issuer will repurchase bonds with callability.

• Federal Open Market Committee

  • The Fed can use outright purchases and sales or use repurchase agreements.
  • Second, the Fed uses the Federal Reserve repurchase agreement (REPO) to buy securities from a dealer, and the dealer agrees to repurchase the securities for a specific price and on a particular date in the future.
  • This is similar to a bank repurchase agreement.
  • Then the REPO expires, and the temporary reserves are removed from the banking system, when the dealer repurchases the REPO.

• Reporting Stockholders' Equity

  • Share repurchases, in which a firm gives back money to its investors, reducing its financial assets, and the liability of shareholders' equity.
  • For practical purposes (except for its tax consequences), share repurchasing is similar to a dividend payment, as both consist of the firm giving money back to investors.
  • Rather than giving money to all shareholders immediately in the form of a dividend payment, a share repurchase reduces the number of shares, thereby increasing the percent of future income and distributions garnered by each remaining share.