The basic answer is that share repurchases are great when the share price is undervalued, and not-so-great when the share price is overvalued. To put it into a more useful context, if you would otherwise reinvest your dividends or invest new capital into the company at current stock prices, then share repurchases are useful to you because the company basically does it for you. The alternative is that the company could pay you a higher dividend, but you’d be taxed on that dividend and reinvest it into the company anyway. On the other hand, if you would not reinvest dividends or invest new capital into the company at current prices, then share repurchases are not in alignment with your current outlook, and it would be better for you to receive a higher dividend. Something else to be considered is that when a company uses money for share repurchases when it could be paying a higher dividend instead, the company’s management is limiting your control and increasing theirs.
Going public lowers a company's cost of capital. This is because investors are willing to pay a higher price for a company's stock if the shares are publicly issued due to that the shares can be sold easily compared to the privately issued shares. In addition, publicly traded businesses are usually better known than non-publicly traded businesses. The company can gain better image showing that the company is stable and continuously trading. However, there are some disadvantages: Going public is an expensive process, including legal and accounting fees, filing fees, travel costs, printing costs and underwriter's expense allowance.
If a lot of debt is used to finance increased operations then it will incur a high debt to equity ratio, the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt interest cost, then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. The debt/equity ratio also depends on the industry in which the company operates and Smithon Widgets being a manufacturing company the debt equity ratio is normally high.
When assets price bubble burst, people tend to save money rather than spend money. It arouse market and liquidity risk. Companies and all kinds of industries become harder to make money and gain profits. Therefore, these have done a very serious harm to the real economy. Further more, macroeconomic risk appeared.
As the demand for a country’s goods and services increase, producers increase their output to meet the increased demand. This in turn generates additional income that augments the growth of the country’s economy. When the economy grows, the output or gross domestic product will increase, and citizens can afford a more expensive lifestyle. While, a nation that consistently runs a current account deficit is borrowing from abroad or selling off capital assets to finance current purchases of goods and services, and the continual borrowing is not a viable long-term strategy and selling long-term assets to finance current consumption undermines future production. From these aspects, a trade
However buyback includes discretion at the end of managers and can be used to create false demand in market. This false demand will increase the share price even if company is not meeting expectations and lacking future projects. Managers can also use buyback of shares to increase their compensation if the compensation if related income per share. In other words, false demand or repurchasing will decrease the number of shares and increase income per share, so also increased managers’ compensation. Hurdle Rate based evaluations Hurdle Rate calculation involves beta, risk premium and riskless interest rate, and all these three factors are external to organization system.
If they cannot generate a profit then they will not be able to provide the demand that consumers are requesting. Lenders are paid based off of interest and the ability of a company to pay them. With productive opportunites, the more profitability the business can generate, the higher the interest rate lenders can be paid. The company will also have enough money to have supply and demand for their business. “The interest rate lenders will charge depends in large part on their time preferences for consumption” (Gapenski, L. 2008. pg.
If demand is inelastic there will only be a small increase in Quantity and there could be a fall in the value of exports (Marshall Lerner condition states devaluation only increases AD if PEDx + PEDm >1) Secondly, if there is a devaluation then there will be an increase in the price of imported goods. Imports are quite a significant part of the RPI, therefore there will be cost push inflation. However, it is possible that retailers may not pass the price increases onto consumers but have lower profit margins. Thirdly, if there is a devaluation exports become more competitive (cheaper to foreign buyers) without firms having to make much effort, therefore there is less incentive for them to cut costs and
The term bubble when applied to the stock market refers to an overpriced stock. An economic bubble is “trade in high volumes at prices that are considerably at variance from intrinsic values.” (King, Ronald R). A stock market bubble is a type of economic bubble that occurs when investors overvalue a stock the price rises above the normal stock valuation in a short periods of time. This is because there is a misconception about the stock and people keep paying more than the last trade of already overvalued stock. This goes on till the stock eventually crashes.