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earnings is worth less to investors in the market. A volatile market will challenge a company that is intent on repurchasing its own shares. As with any
investor, companies buying their own shares do not wish to overpay for their purchases. If a volatile
market exists and stock prices are jumping all around, the company with a committed buyback program
will be paying many different prices (some high, some low) for the shares it repurchases.
Stock repurchases will reduce the company’s cash balances (affecting both liquidity and
solvency) and will lower the company’s equity base (increasing leverage). Subsequent
reissuances will increase cash balances and equity levels, but the reissue price will
those equity levels will be fully restored. If the stock is reissued for a lower
price than the
acquisition price, a permanent hit to equity will occur (adjusted through
Additional Paid In Capital,
assuming APIC balances are sufficient). If, on the other hand,
the stock is reissued for a higher price,
then an increase in equity balances will occur.
Borrowing to repurchase...
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