Five common rationales for share repurchases (versus dividends):

[FrankCFA]

1. Potential tax advantages: When capital gains are taxed favorably as compared to dividends.
2. Share price support/signaling: Management wants to signal better prospects for the firm.
3. Added flexibility: Reduces the need for “sticky” dividends in the future.
4. Offsets dilution from employee stock options.
5. Increases financial leverage by reducing equity in the balance sheet.

Would like to know what kinds of situation the frim will prefer increase financial leverage? Thanks.

 

[Would You Look]

Equity is too expensive; looking to move towards a target capital structure, etc…

 

[cgy5478]

Also, if you fund the repurchase with D, your D/E will increase even more than using your own equity to repurchase.

 

[S2000magician]

Increasing financial leverage can increase ROE. If a manager’s bonus is tied to ROE … .

 

[FrankCFA]

Got it. Thanks!

 

[S2000magician]

My pleasure.