Examples of share repurchase in the following topics:
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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.
- All financial ratios that include the number of shares outstanding (notably earnings per share, or EPS) will be affected by share repurchases.
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Repurchasing Shares
- An alternative to cash dividends is share repurchases.
- In a share repurchase, the issuing company purchases its own publicly traded shares, thus reducing the number of shares outstanding.
- When a company repurchases its own shares, it reduces the number of shares held by the public.
- If the company has put rights on its shares, it may use them to repurchase shares at that price.
- The company repurchases shares from all shareholders who stated a price at or below that repurchase price .
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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.
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Reporting Stockholders' Equity
- Equity (beginning of year) + net income − dividends +/− gain/loss from changes to the number of shares outstanding = Equity (end of year).
- 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.
- The market value of shares in the stock market does not correspond to the equity per share calculated in the accounting statements.
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Repurchasing Stock
- The company either retires the repurchased shares or keeps them as treasury stock, available for re-issuance.
- In an efficient market, the net effect of a stock repurchase does not change the value of each share.
- So, the net effect of the repurchase would be zero.
- In an inefficient market that has underpriced a company's stock, a repurchase of shares can benefit current shareholders by providing support to the stock price.
- Consider a company that repurchases 15,000 shares of its $1 par value stock for $25 per share.
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Dividends Payable
- There are two ways to distribute cash to shareholders: share repurchases (reported as treasury stock in the owner's equity section of the balance sheet) or dividends.
- A dividend is allocated as a fixed amount per share.
- Therefore, a shareholder receives a dividend in proportion to the shares he owns -- for example, if shareholder Y owns 100 shares when company Z declares a dividend of USD 1.00 per share. then shareholder Y will receive a dividend of USD 100 for his shares.
- The per share dividend amount is multiplied by the number of shares outstanding and this result is debited to retained earnings and credited to dividends payable.
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Stock Dividends
- Instead of each shareholder receiving, say $2 for each share, they may receive an additional share.
- The total number of shares outstanding increases in proportion to the change in the number of shares held by each shareholder.
- As the number of shares outstanding increases, the price per share drops because the market capitalization does not change.
- A stock split is paid by switching out old shares for a greater number of new shares.
- The company may have gotten these shares from share repurchases, or simply from them not being sold when issued.
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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.
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Long-Term Relationships: Satisfaction and Loyalty
- Brand loyalty in marketing consists of a consumer's commitment to repurchase or otherwise continue using the brand and can be demonstrated by repeated buying of a product or service, or other positive behaviors, such as word of mouth advocacy.
- Brand loyalty is more than simple repurchasing, however.
- Customers may repurchase a brand due to situational constraints (such as vendor lock in), a lack of viable alternatives, or out of convenience.
- Such loyalty is referred to as "spurious loyalty. " True brand loyalty exists when customers have a high relative attitude toward the brand which is then exhibited through repurchase behavior.
- Although sales or market share can indicate how well a firm is performing currently, satisfaction is perhaps the best indicator of how likely it is that the firm's customers will make further purchases in the future.
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Brand Loyalty
- In marketing, brand loyalty refers to a consumer's commitment to repurchase or otherwise continue using a particular brand by repeatedly buying a product or service.
- Aside from a consumer's ability to repurchase a brand, true brand loyalty exists when a. ) the customer is committed to the brand, and b. ) the customers have a high relative attitude toward the brand, which is then exhibited through repurchase behavior.
- Thus, "brand penetration" or "brand share" reflects only a statistical chance that the majority of customers will buy that brand next time as part of a portfolio of brands.