Canada's Deputy Prime Minister and Minister of Finance Chrystia Freeland attends a news conference about the fall economic statement in Ottawaplans last week to tax companies that use their profits to buy shares back from investors. Below is a base-level explainer of share buybacks, their purpose and why Ottawa is setting its targets on one of the ways corporations reward their investors.
buying or merging with other businesses that the company sees as beneficial to growing its core business; “It’s not a dirty thing. It’s not something we should say, ‘ew, that’s gross,'” Schwartz said of share buybacks. “It’s part of your five tools of capital allocation as a CEO or a CFO.”There are several reasons companies might choose to execute share buybacks and it’s “a function of a properly formed stock market,” Schwartz said. When a company buys back its shares, it reduces the number of outstanding shares in the stock market and theoretically its share price should rise.
Companies can also decide to repurchase shares if executives believe the current stock market price is trading below what they think it’s worth. Leaders can run calculations, determine what the value of the product they sell might be in the future, take into account current production levels, among a whole host of other considerations, and deem that the price ought to be higher.
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