Why the companies redeem the actions?

Why the companies redeem the actions? Why the companies redeem the actions?

The main reason, on which company redeem the actions, consists in transition of money from working sectors and investments into new branches or for company expansion. Repayments of actions become more and more frequent and this quite healthy phenomenon in present economy.

When there is no investment possibilities, such actions offer an exit to demanded standards of profitability, management of money comes back to shareholders who, subsequently, can find investments which meet their requirements. When the company redeems own actions it is necessary to remember M. Jensen’s theory about a free cash flow.

Shareholders and the management can have and other reasons to redeem the actions:

· Change of relative balance of shareholders between those who refuses to sell the shares of the company for the management reasons (that is to increase the percent of possession) and those who will agree to sell a part of the actions, but hopes that at level is higher than their market cost. So recently occurred to Peugeot.

· For the tax reasons, as it often less expensive option for shareholders for receiving cash in the form of repayment of actions, than in the form of dividends;

· To send a positive signal, that is, that the management considers the company of the underestimated. Repayment of actions increases cost of the remained actions. Considering recent events in the share market, it can be very strong incentive, such as sewerage pro-cleaning in case of a jam.

· A credit shoulder from debts, for the corresponding tax privileges. It is not so convincing motivation as it ignores that fact that debt and share obligations increase after repayment of actions. The tax privilege often is illusory as the company loses some financial flexibility.

· A certain reserve of actions which will be used further for options or as currency for acquisition prepares.

· Smoothing of fluctuations of the price of actions in case of internal or external negative factors.

Conclusion for the investor or the creditor: repayment of actions reduces solvency of the company and, therefore, increases its risks of loss of a considerable part of investments or investments.

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