9) Share Buybacks

Question 1

what are some of the advantages of a share buyback?

Answer 1

• more flexible for the company
• possible tax advantages
• can change cap structure and increase d/e ratio

Question 2

what kind of decision is share buyback?

Answer 2

financing and investing

Question 3

when will share buyback be an investing decision?

Answer 3

when they are trading at a low value and want to signal that their shares are undervalued using a share buyback

Question 4

what does a share buyback signal?

Answer 4

that the company’s shares are undervalued

Question 5

what impact does share buyback have on SOFP?

Answer 5

decreased cash and SC

Question 6

what impact does share buyback have on EPS?

Answer 6

it will be higher as there are fewer SH amongst which earnings must be divided

Question 7

what can a company use excess cash for?

Answer 7

• repaying debt
• investing in growth opp
• paying divs
• repurchasing shares

Question 8

why would a company do a share buyback?

Answer 8

• reduce dilution
• if future invs are uncertain, will want to inv in themselves rather
• shares are undervalued (attract investors)

Question 9

why is share buyback a financing decision?

Answer 9

they impact cash available for reinvestment and capital structure through the reduced equity

Question 10

what are the negatives of share buybacks?

Answer 10

• mgmt has no new ideas for growth
• artificially boosts EPS and share price
• mgmt compensation may be linked to EPS

Question 11

what should mgmt consider before engaging in a buyback?

Answer 11

• sustainability of CF (if uncertain for future, buyback is preferred as it reduces future obl. to pay divs)
• predictability of inv needs (if uncertain, flexibility of buyback can appeal to mgmt)
• the tax preferences of SH

Question 12

what Co. Act requirements must be met when engaging in a share buyback

Answer 12

distributions

Question 13

what takeover regulations must be considered for share buyback?

Answer 13

if a SH has effective control as a result of buyback, then an offer must be made to all SH at the buyback price

Question 14

what is a criticism to share buybacks?

Answer 14

it prioritizes s/t profits over the long term return on inv

Question 15

what are the limitations for share buybacks by subsidiaries?

Answer 15

limited to 10% of equity capital

Question 16

what are the limitations for buybacks?

Answer 16

special resolution is required for a company to buyback more than 5% of its shares

Question 17

what are treasury shares?

Answer 17

shares held by subsidiaries in the parent – no voting rights but not cancelled

Question 18

what is the advantage of treasury shares?

Answer 18

offers flexibility as these shares can be traded in at a later stage, or cancelled