© 2000 John Petroff
|
|
© 2000 John Petroff |
| No rated * * * * * | Resize -A +A |
In the United States, as in most countries, a corporation is
not allowed to trade in its own stock for the purpose of manipulating
or influencing its price. But it is allowed to buy its own stock
if there is a legitimate purpose such as
- paying a stock dividend
- exercising stock options given to key executives
- allowing employee stock purchase plans and profit sharing
- acquiring another company in exchange of own stock
- fending off an unwanted take-over bid
- selling existing shares rather than new shares in exercise of
warrants or conversion rights
- increasing debt by reducing equity
- retiring a portion of stock
Obviously, none of these is a source of capital but a reduction
of capital. None of these purposes should be of great concern
except the last two. Retiring stock
is usually viewed negatively by investors because it is a message
that management cannot find new profitable projects to undertake.
Replacing equity by debt is naturally the very essence of financial
leverage. To the extent that the company may have been substantially
unleveraged before, the replacement would be appropriate.
See review questions Q-12G1.1 and Q-12G1.2.
| Previous: Debt management |
|
Next: 2-Bond refunding |