share buy-back #basics

  • shares outstanding — reduced, since the repurchased shares (say 100M out of 500M total outstanding) is no longer available for trading.
  • Who pays cash to who? Company pays existing public shareholders (buying on the open market), so company need to pay out hard cash! Will reduce company’s cash position.
  • EPS — benefits, leading to immediate price appreciation
  • Total assets — reduces, improving ROA/ROE
  • Demonstrates comfortable cash position
  • Initiated by — Management when they think it is undervalued
  • Perhaps requested by — Existing share holder hoping to make a profit
  • company has excess capital and
  • A.k.a “share repurchase”

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