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Financial Statement Analysis - Coursework Example

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It provides a tax treatment that is more preferred to its shareholders than offering dividends. Issued stock is also known as treasury stock, a repurchase is attained through open markets, Dutch action…
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Financial Statement Analysis
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Download file to see previous pages It can also be defined as a strategy by which a firm buys its own shares, with an aim of reducing outstanding shares (Baker, 2009 p. 268). Firms issue stock repurchases due to the following reasons.
It leads to increase in earnings per share, earning per share can be defined as the proportion of firms profits allocated to every outstanding share. The reasoning behind it is that when the number of outstanding shares decreases the earnings per share increase. When a company earnings increase it builds a positive image of the firm and financial stability of the is also boosted.
It elevates the value of remaining ordinary shares, the value of the remaining shares increases. When a company repurchases shares, the remaining shares gain value as dilution decreases. This makes a company to boost its financial stability, in a means that does not affect the company adversely, because there is no additional debt (Baker, 2009 p. 174).
It’s also a method to earn more returns, the management of the company may decide to buy their own company shares when they are undervalued, and sell them when their prices increases in order to reflect the true value of the company. This helps a firm from takeovers or be acquired by other firms.
It leads to investing the excess cash the company has on its own stock. The management makes use of the companys excess cash by investing in their own stock. This is because the management believes that the cash invested in their own company is less risky and have higher return compared to other investments.
It leads to lower taxes, when a firm uses excess cash to buy back stock instead of paying dividends, the shareholders are in a position to defer capital gains and taxes especially when there is an increase in stock prices. Dividends declared to shareholders are regarded as income and therefore taxable as ordinary income. Therefore, shareholders are advantaged.
Earnings per share can be defined as a measure of ...Download file to see next pagesRead More
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