1. To provide an internal investment opportunity.
 To modify the firm's capital structure.
 To impact earnings per share, thus increasing stock
price.
Stock Repurchases: Benefits

2. Share repurchase as a dividend decision:
 A firm may decide to repurchase its shares, increasing
the earnings per share which should be reflected in a
higher stock price.
 For tax purposes the investor may prefer the firm to
repurchase stock in lieu of a dividend. Dividends are
taxed as ordinary income, whereas any price
appreciation resulting from the stock repurchase
would be taxed as a capital gain.
 The investor may still prefer dividend payment
because
 Dividends are viewed more dependable than
stock repurchases.
 The price the firm must pay for its stock may
be too high.
 Risk of the firm's capital structure may
increase, lowering the P/E ratio and thus the
stock price.

3. Financing or investment decision
 A stock repurchase effectively increases the debt-
equity ratio towards higher debt, thus repurchase
is viewed as a financing decision.
 Buying its own stock at depressed prices, a firm
may consider the repurchase as an investment
decision. However, this action is not a true
investment opportunity, as the extreme result
would mean the company would consume itself.
 The Stock Repurchase Procedure
 A public announcement should be made detailing
the amount, purpose and procedure for the stock
repurchase.
 Open market purchase - at the current market
price.
 Tender offer - more formal and at a specified price.
 Negotiated basis - repurchasing from specific large
shareholders.

4.  Buying own stock back from
stockholders
 Reasons for repurchases:
 As an alternative to distributing cash as
dividends.
 To dispose of one-time cash from an asset
sale.
 To make a large capital structure change.

5.  Stockholders can tender (sell) or not.
 Helps avoid setting a high dividend that
cannot be maintained.
 Repurchased stock can be used in takeovers
or resold to raise cash as needed.
 Income received is capital gains rather than
higher-taxed dividends (sometimes).
 Stockholders may take as a positive signal--
management thinks stock is undervalued.

6.  May be viewed as a negative signal (firm has
poor investment opportunities).
 IRS could impose penalties if repurchases
were primarily to avoid taxes on dividends.
 Selling stockholders may not be well
informed, hence be treated unfairly.
 Firm may have to bid up price to complete
purchase, thus paying too much for its own
stock.