The document discusses stock buybacks, which is when a company repurchases its own shares from the marketplace. This reduces the number of outstanding shares and can indicate management believes the shares are undervalued. A company can perform open market purchases, tender offers, or targeted repurchases. Stock buybacks are sometimes preferred over dividends for flexibility, to offset stock dilution, and when management believes the stock is temporarily undervalued. The document outlines various methods, restrictions, factors driving and steps involved in companies performing stock buybacks.
Chapter 2.ppt of macroeconomics by mankiw 9th edition
Benefits of Stock Buybacks for Companies and Shareholders
1. BUYBACK OF STOCKS
PAGE NO – 646 TO 653
HEADING - 19.4
Group - 17
BY
SONAKSHI GOEL -141349
SOUMITRA TIWARI – 141350
SUKET GUPTA - 141351
2. Buyback of Stocks
• Instead of paying dividends a firm may use cash to
repurchase shares of its own stock.
• A program by which a company buys back its own
shares from the marketplace, reducing the number of
outstanding shares. Share repurchase is usually an
indication that the company's management thinks the
shares are undervalued. The company can buy shares
directly from the market or offer its shareholder the
option to tender their shares directly to the company at a
fixed price.
3. Accomplishing of Buyback of Stocks
1. Open market purchase - Companies simply purchase their own
stock.
2. Tender offer - the firm announces to all its stockholders that it is
willing to buy a fixed number of shares at a specific price.
3. Targeted repurchase – firm may repurchase shares from specific
individual stockholders. Here, a single large stockholder can be bought
out at a price lower than that in a tender offer. Also, the legal fees in a
targeted repurchase may also be lower than those in a more typical
buyback.
4. Why Buyback Over Dividends
Flexibility – Firms view dividends as a commitment to their stockholder.
The firm whose cash flow increase is only temporary is likely to repurchase
shares of stocks.
Executive compensation - Executives are frequently given stock options
as a part of their overall compensation. Existing stock options will always
have greater value when the firm repurchases shares instead of paying a
dividend.
Offset to dilution – Exercise of stock option increases the number of
shares outstanding.
Undervaluation – Many companies buy back stocks because they believe
that a repurchase is their best investment. This occurs more frequently
when the managers believe that the stock price is temporarily depressed.
5. Methods of Buyback
• Open offer purchase: in this company buy share directly
from the stock market through broker.
it fix a maximum price and stipulate number of shares it
want to purchase.
• Tender offer: offer is at a fixed price (usually a higher
price than market price)
it is to the maximum number of shares the company is
willing to purchase.
6. Restrictions of Buyback
• There are following requirements to buyback which was
amended in 2002 they are
• Buyback should not exceed 25% companies total paid
capital and free reserves of the company.
• A special resolution has to be passed by shareholders.
• Post buyback debt to equity ratio should not be more
than 2:1
• A declaration of solvency to be filed with SEBI.
• The page brought back should be physically destroyed.
7. Factors driving Buyback of Shares
• Unused cash
if company has huge cash, no profitable project to invest in and think its
shares are undervalued.
• Tax Gains
Since dividends are taxed more than capital gain, so company prefers
buyback to reward their investors instead of distributing cash dividends
• Market Perception
Buy buying shares at higher prices then market price, company sends
a signal that the share valuation should be higher.
• Escape monitoring of accounts and legal control
If company wants to avoid the regulations of the market regulator by
delisting from local stock exchange. They avoid any public scrutiny of
its book of accounts
8. Steps Involved in a Buyback
• Shareholder may be presented in the tender offer
whereby they have the option to submit a portion or all of
their shares within a certain time frame and at a premium
to the current market price. This premium compensation
investor for tending their shares rather than holding on to
them.
• Companies buy back shares on the open market over an
extended period of time.
9. • Show rosier financials
To show better financial ratios.
• Increase promoter’s stake
To increase the promoters holdings
10. REFERENCE
• Corporate Finance by Stephen A. Ross, Randolph W.
Westerfield, Jeffrey Jaffe, Ram Kumar Kakani
• Investopedia.com
Thank you