The Effect of Share Repurchases by a Company

When stock is bought back by a company it is taken out of circulation (from the stock market). Thus, decreasing both the number of shares outstanding, and the equity base (at present) due to cash expenditures needed for the buy back (which create a corresponding decrease in the asset column, hence, shrinking the equity.

This kind out situation proves to be economic brilliance on the part of the company, and the remaining holders for three main reasons:

1. The company would cause, as a result of the buy back, a significant increase in per share earnings in the future; due to the shrinkage in equity.

2. The company obviously has great expectations of itself in the future, so, why not invest in itself?

3. The future earnings multiples the company’s stock would trade at will quite possibly increase as a result of the “unexpected increase” in the (future) per share earnings.