Thesis: Purchase of Own Shares at a Premium

Sample Thesis Paper

In the course of the life of a business there also comes a time when a company needs to reduce the number of outstanding shares. Although reduction of the authorized capital is prohibited in many jurisdictions, companies are able to purchase their own shares in the markets under several conditions. The purchase of a company’s own shares in the markets is referred to as a share buyback (Copeland et al. 2000). The purchase can be done when the capital has excess capital or when the company is scaling down operations. Purchase of own shares has also been witnessed during takeovers where the target purchases its own shares to reduce the control of the hostile company. In many cases of own shares purchases the shares are purchased at a premium. The effect on the book value of the company is usually two fold.  First the calculation changes as a result of the reduction in the number of outstanding shares. This happens because the purchased shares are usually cancelled and eliminated from the books. The second effect results from the assets used to pay off the shareholders whose shares are purchased. This reduces the amount of assets held by company and therefore the calculation of the book value.  Most of the times the shares are purchased at a premium and the reduction in assets are of higher proportion tan the reduction in the number of outstanding shares. In such a case the book value falls. If the shares are purchased at a discount the book value increases. If the shares are not eliminated and retained in the books they are referred to as treasury stocks in such a case the book value still changes in the same way (Allman, 2010).

Dividend Payments:  Dividends are usually paid from the assets held by the company. The assets may be from accumulated reserves or from new earnings. The effect of dividends payments is to reduce the value of the book value per share (Richardson and Tinaikar, 2003). Dividends payments however occur in many ways. The only dividends payments that results in a reduction in the book value are issuances that result in cash distribution to the shareholders or the issuance of stocks to the shareholders in lieu of dividends. In the first case the outstanding shares remain the same while the assets decrease while in the second case the outstanding shares increase while the assets remains the same. In both cases the book value per share falls.

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