Issuing Common and Preferred Stock Generally Has Been Popular Among

question 103

Essay

Issuing common and preferred stock generally has been popular among corporations. However, some companies have bought back their common stock. For example, because its stock had declined under the uncertainty of possible health care reforms, Bristol-Myers Squibb bought 25 million of its own shares. Other companies have been awash in cash because of the decline in interest rates, layoffs to cut costs, and decreased need to make new investments. Quaker Oats purchased 4.8 million of its own shares for $323 million and plans to purchase 5 million more. The Quaker Oats treasurer was quoted as saying, "We spend on new products, we make acquisitions, we raise the dividend, and we still can't soak up the cash." Sun Microsystems cut its outstanding shares by 9 percent with an aggressive buyback program, and PepsiCo purchased 50 million shares at a cost of $1.8 billion. For what reasons would a company buy back its own shares?

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Definitions:

Processed Beyond

A term used to describe a stage in production or manufacturing where goods have progressed past a certain point in the production process.

Absorption Costing

An accounting method that includes all direct and indirect manufacturing costs in the cost of a product, including overhead.

Cost-plus Pricing

A pricing method where a fixed percentage is added to the total cost of producing a product or service to determine its selling price.

Return on Investment

A measure of the profitability and efficiency of an investment, calculated as the return (or gain) from an investment relative to its cost.