Buying back shares to satisfy stock compensation plans

CFA Level I FRA
#1

Which of the following is least likely a primary reason a company would raise capital through the issuance of equity securities? To:
A- finance the purchase of long-lived assets
B- maximize the wealth of shareholders
C- directly satisfy stock compensation plans

Answer

C is correct. In general, a company will utilize share buybacks to satisfy stock compensation plans. A is incorrect. In most cases, the capital that is raised is used to finance the purchase of long-lived assets, capital expansion projects, research and development, the entry into new product or geographic regions, and the acquisition of other companies.
B is incorrect. The primary goal of raising capital is to finance the company’s revenue generating activities in order to increase its net income and maximize the wealth of its shareholders.

Can someone please explain to me in which way does buying shares back “satisfies stock compensation plans”? Really having hard time translating that in practical terms.

Thanks!

#2

I suspect that they mean that employees are given stock options, then, when they’re exercised, the company buys back the stock so that the employees get cash.

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#3

Ok now i see! Like on these Diluted EPS exercises when there are stock options ending in the money (buy back shares with the proceeds of the options’ exercises…). Everything is connected, we’re in the Matrix.

Thanks s2000magician.

#4

My pleasure.

#5

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