Why might a company choose to conduct stock buybacks?

• A. To reduce overall debt levels
• B. To increase the liquidity of shares
• C. To enhance earnings per share and signal confidence to investors
• D. To pay higher dividends to shareholders

Answer: (C)

Companies often conduct stock buybacks for various strategic reasons, one of which is to enhance earnings per share (EPS) and signal confidence to investors. When a company repurchases its own shares, the number of outstanding shares decreases. This reduction in shares can lead to a higher EPS, assuming net income remains constant, since earnings are distributed among fewer shares. A higher EPS can make the company appear more profitable and financially healthy, which can attract investors and potentially boost the stock price.

Additionally, buybacks can be interpreted by the market as a sign of confidence from the company’s management in its future growth and stability. This confidence can reassure investors and may encourage further investment, creating a positive feedback loop for the company’s stock price. The psychological impact of buybacks, signaling that management believes the stock is undervalued, can also lead to increased demand for shares.

While companies may consider other financial strategies such as reducing debt, increasing liquidity, or enhancing dividends, these options do not directly contribute to the enhancement of earnings per share nor do they necessarily convey the same degree of confidence to the investors.