In which of the following situations might a stock repurchase result in increased firm value?

Question

Quizplus · Accepted Answer

If a firm has excess cash flow with no positive NPV projects to invest in, then repurchasing shares can be a way to distribute the excess cash flow to shareholders. This can increase the value of the firm by reducing the number of outstanding shares and increasing earnings per share, which can result in a higher stock price. However, options A and B do not necessarily result in increased firm value, and option D is incorrect as stock repurchases can have an impact on firm value. When a firm without any positive NPV projects executes a repurchase to distribute excess cash flow to the shareholders, it signals that the company does not have profitable investment opportunities and returning cash to the shareholders is the best use of that cash. This can increase investor confidence in the company and ultimately result in increased firm value. However, open market or targeted repurchases are not necessarily beneficial for increasing firm value.

In Which of the Following Situations Might a Stock Repurchase