GCU ACC 502 Topic 6 DQ 2

Topic 6 DQ 2

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Businesses need stocks because they are securities that represent ownership of shares. Issuing stock in companies serves to acquire more capital that aids the growth and the companies’ investments.Many companies may resolve to buy back their stock because of some reason. While a company buying back its stock has positive impacts, there are adverse effects that a company can face by repurchasing its own stock.

One of the reasons a company buys back its own stock is to preserve the stock price. Shareholders regularly anticipate that a company should pay a reliable stream of expanding dividends. One of the goals of a company’s managers is to build investors’ wealth. Be that as it may, assuming the economy falls into a downturn, firm administration should find a balance between satisfying investors and staying light-footed. For example, if the economy weakens or enters a recession, the company may be forced to reduce its dividend to save money. The stock would in all likelihood drop accordingly. If the company chose to repurchase fewer stocks to achieve the same equity investments as a dividend cut, the stock price would undoubtedly suffer more minor damage. Increasing dividends on a regular basis would undoubtedly boost a company’s stock price, but the dividend strategy can be a double-edged sword. In the case of a recession, share buybacks can be lowered more quickly than dividends, and they have a substantially lower negative impact on stock prices (Bendig et al., 2018).

Another reason a firm buys back its own stock is to correct a financial statement error. Stock repurchases are another simple way to make a company appear more enticing to investors. The earnings per share (EPS) ratio of a corporation is enhanced when the number of outstanding shares is lowered, because less outstanding shares now split annual earnings. A company with 100,000 outstanding shares and a yearly profit of $10 million, for example, has an EPS of $100. Its EPS climbs to $111.11 without any increase in earnings if it buys back 10,000 of those shares, reducing the total number of shares outstanding down to 90,000 (Roe,2018).

However repurchasing stock has a negative effect. One of the effects is that a stock buyback influences an organization’s credit score if it needs to get cash to repurchase the offers. Many organizations finance stock buybacks because the credit interest is tax-deductible. On the other hand, debt commitments deplete cash reserves, which are often required when the economy turns against a corporation. Hence, credit reporting organizations view such-financed stock buybacks negatively: They don’t see supporting EPS or exploiting underestimated shares as a decent defense for assuming obligation. A downsize in credit score regularly follows such a move (Bennett and Wang, 2021).

References

Bendig, D., Willmann, D., Strese, S., &Brettel, M. (2018). Share repurchases and myopia: Implications on the stock and consumer markets. Journal of Marketing, 82(2), 19-41.

Bennett, B., & Wang, Z. (2021). Stock repurchases and the 2017 tax cuts and jobs Act. Available at SSRN 3443656.

Roe, M. J. (2018). Stock Market Short-Termism’s Impact. University of Pennsylvania Law Review, 71-121.