Unforseen

Share purchases do not change the shareholder share of the company. But what has changed is that the company transfers cash to the shareholder. Transferring cash to the shareholder is the same as a dividend payout. Thus, share purchases is *equivalent to a dividend distribution. Thus, the % reduction of shares outstanding has a positive effect to the expected return just as the dividend yield has the positive effect on the expected return.

*This is L2 material.

bboo

my fellow analist ........no matter how it is presented just ask urself how it affects the stock price......................share buyback = share appreication so contribs positively to E(R) for

lcai

It makes sense to remember what the term is. Companies return capital to shareholders directly in one of two ways :

1. By making dividend payments, which usually come out of earnings
2. By buying back shares of stock , thus reducing capital employed

Since the act of reducing shareholding makes the company more valuable to the remaining shareholders ( because their interests in future profits are increased , given lower number of shares) , we treat a change in shares to the negative as a good thing.

while a change to the positive i.e. a net issuance of additional shares ( representing a dilution of the current shareholders interest) as a bad thing.

So delta S is simply the period to period change in shares ( signed ) ,while the meaning to the shareholder is attributed with a negative sign in GK's formula.

+ve delta S ( net increase of shares) = bad thing i.e. has an effect of -( delta S)
-ve delta S ( net reduction of shares) = god thing i.e. has an effect of -( delta S)
where the term in parenthesis is a negatively signed quantity

canadiananalyst

janakisri, what's "+ve"? thanks.