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......The company decides to buy back 20,000 shares for $1 million dollars. This means that there are now only 80,000 shares of ABC. Therefore, a stockholders stock now represents .00125% of the company instead of .001%, a 25% increase in value per share. The stock in ABC is now worth $62.50 per share instead of $50 (Kennon). Conventional logic regarding this situation is fairly straightforward; shareholders win. But, as we shall discover, there are disadvantages as well
2.1 Stock Buyback Advantages
Stock buybacks improve a firms financial ratio. Although a stock buyback reduces cash, return on assets increases because the cash component of assets on the balance sheet is reduced. Return on equity increases because there is less outstanding equity. The buyback also helps to improve the companys price-earnings ratio due to the reduction in outstanding share. All of these metrics, particularly the price-earnings ratio, are considered important metrics to judge investment in a company and their improved positions due to the stock buyback may lead to additional stock demand/appreciation. In addition, stock buybacks send a strong signal to the market that a firms management believes the shares are undervalued (Palley, 2007)......

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