Share
Explore BrainMass

Why do companies buy back their own stock? How does the cost of capital affect a company's capital expenditures?

1. Why do companies buy back their own stock?

2. How does the cost of capital affect a company's capital expenditures?

3. Why would a company issue a stock dividend instead of a cash dividend?

4. What is the relationship between a firm's capital structure and the maximization of shareholders' wealth?

Solution Preview

Business, Finance
Year 3

Stock

1. Why do companies buy back their own stock?

ANS: The repurchase of company stock indicates managerial confidence in the business and their belief that the share price is undervalued. The effect of buying back their own stock would include:
? Raising earnings per share
? Increasing stock for employee 'stock options' and pension plans
? Increasing managerial (internal) control of the company

2. How does the cost of capital affect a company's capital expenditures?

ANS: The 'cost of capital' is a sum of money that it is required to be paid out from the business to those who have invested in the company. Investors are looking for a return on their investment and are free to choose who they invest their money with. Companies therefore offer differing 'rates of return' dependent on investment level to induce investors to buy shares or hold a financial security with their company. It is the paid out ...

Solution Summary

You will find the answer to this puzzling question inside...

$2.19