In an article entitled “Buybacks or Giveaways,” CFO.com reported that “large repurchase programs required a whole lot of capital. Critics of buybacks contend that companies can put their cash to better use. They also point out that investors are more likely to reward a company that attempts to grow its business-rather than artificially inflate its stock price.” The article goes on to the quote an investment banker as saying that “[stock repurchase programs] can be a sign that company can’t find anything better to do with its cash. ”
Required
(a) Described some other use for a company’s cash. How could these uses benefit shareholders more than a stock repurchase?
(b) Why might the stock market interpret a company’s purchase of its own shares as a way to “artificially inflate” its stock price?
(c) If the stock market is trading at very high levels, what risks do companies face with their stock repurchasing plans?