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BPP text-pg 46
benefits of share buyback
Increase in earnings per share through a reduction in the number of shares in issue. This should lead to a higher share price than would otherwise be the case, and the company should be able to increase dividend payments on the remaining shares in issue
I dont understand how increase in geating is a benfit to the company and why a company would be interested in wanting to “INcrease gearing ?
sorry my apologies.. the statemnt was
Increase in gearing. Repurchase of a company’s own shares allows debt to be substituted for equity, so raising gearing. This will be of interest to a company wanting to increase its gearing without increasing its total long-term funding
The statement you have quoted does not mention gearing at all.
However, in addition to the benefit that is stated, higher gearing can be attractive because debt borrowing (after the tax benefit) is much cheaper than equity borrowing, and the overall cost of borrowing will fall (as per Modigliani and Miller). Have a look back at the free Paper FM lectures on the theories of gearing.
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