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

Question

Quizplus · Accepted Answer

Repurchasing shares from specific shareholders at above-market prices indicates that the firm is overpaying for those shares, which reduces the value of the remaining shares held by other shareholders. This can result in a decreased firm value. In contrast, option A involves distributing excess cash flow to shareholders, which may benefit the remaining shareholders by increasing their ownership percentage, while option C does not provide enough information to determine the impact of the repurchase on firm value. Option D is incorrect as stock repurchases can impact the value of the firm. Executing a stock repurchase at above-market prices to buy back shares from specific shareholders would result in a decreased firm value as it essentially amounts to overpaying for the shares. In this scenario, the firm is using its cash to buy back shares at an inflated price, which detracts from the value that could be generated if the cash were invested in more profitable projects. On the other hand, executing a repurchase to distribute excess cash flow (A) or doing an open market repurchase (C) might not necessarily result in decreased firm value. Option D is incorrect as stock repurchases can indeed impact the value of the firm, either positively or negatively.

In Which of the Following Situations Might a Stock Repurchase