1. Stock Repurchase:
If firm buy back some of its own outstanding share to
reduce the number of share outstanding is known as
stock repurchase.
Stock repurchase can substitute the cash dividends as
a way to distribute funds to shareholders. When
common stock is repurchased for retirement, the
under lying motive is to distribute excess cash to the
stockholders. When a firm has excess cash but if there
is no any profitable investment opportunities in near
future to use excess fund then company use stock
repurchase.
2. Equilibrium stock repurchase price:
Repurchase price or equilibrium price is the price
that brings capital gain equal to the cash dividend.
Share price for repurchase is calculated from the
following equation:
Repurchase price(P*)= Po × N
N-n
Where, N = Total number of shares outstanding
Po = Current market price per share
n = Number of shares to be repurchased
3. Methods for the repurchase of stock:
1. Open market: Under this alternative a company
buys the shares from the open market at the
market price.
2. Tender offer: Under this method, the company
makes a formal offer to shareholder to repurchase
its own stock at a set price.
3. Negotiation basis: The firm can purchase a block
of shares from one large holder on a negotiation
basis.
4. Reason of stock repurchase:
a. To bring the change in present capital structure by
reducing the equity permanently.
b. To reduce the number of shares outstanding.
c. To increase the value of firm.
d. To increase DPS and EPS.
e. To increase the MPS
