Share Buybacks

Question 1

Describe the different mechanisms available to a firm to use to repurchase shares? 3

Answer 1

There are three mechanisms. 1) In an open-market repurchase, the firm repurchases the shares in the openmarket. This is the most common mechanism in the United States.

2) In a tender offer the firm announcesthe intention to all shareholders to repurchase a fixed number of shares for a fixed price, conditional onshareholders agreeing to tender their shares. If not enough shares are tendered, the deal can be cancelled.
3) A targeted repurchase is similar to a tender offer except it is not open to all shareholders; only specificshareholder can tender their shares in a targeted repurchase.

Question 2

What options does a firm have to spend its free cash flow (after it has satisfied all interest obligations)?

Answer 2

It can retain them and use them to make investment, or hold them in cash. It can pay them out to equity holders, either by issuing a dividend or by repurchasing shares.