Page 112, Schweser book 3, question 7: Which of the following WONT be a good reason for a comany to repurchase its stocks? --> ok B is correct, but I believe A also makes sense!!! i.e. if a company believes a stable cash dividend is the best interest of shareholders, then it shouldn’t relay on stock repurchases?? Help me out here!
Put the whole question
my guess is it’s going to be something like ok, so say the company has $50 mil in earnings for the year. if you have a stable div policy saying you’re going to pay out whatever amount in divs, let’s say 75% or something, then you wouldn’t have much extra cash to buy back shrs. granted, you could always borrow $$ to buy back shares, etc, but depending on how the question is phrased (don’t have my books here), maybe it’s as simple as that? if you’re paying the excess $$ in divs, you probably aren’t going to be doing quite as many stock repurchases with the $$ you’re making? i could be 100% talking out of my &ss here.
ok here are the answers: a BAD reason for a company to repurchase: A. Believes a stable cash dividend is the best interest of shareholders. B. Believes its stock is overpriced. both of them make sense!
hmm… given those 2 definitely B is the worse thing. not sure why it would be a good thing then to repurchase shrs if you wanted to pay out a stable div. overpriced jumps off the page there as a really bad idea. if anyone else can illuminate why buying back shrs would be good, logic puts me in your camp Usif, seems like the 2 wouldn’t go together like peanut butter and jelly.
if the stock is overpriced, there is no point to buy it -> bad reason stable cash dividend is not necessarily in the best interest interest of shareholders, they might be more interested in capital gains. stable cash dividend is more important as a signal
B is correct If a company’s shares are believed to be underpriced the company will repurchase shares - to support it sorta So if a company’s shares are overpriced - that’s a bad reason for share repurchase…