Sample interview questions: How do you evaluate the financial viability of stock repurchases?
Sample answer:
Evaluation of Financial Viability of Stock Repurchases
To evaluate the financial viability of stock repurchases, a thorough assessment should consider the following key factors:
1. Availability of Excess Cash Flow:
Ensure that the company has sufficient cash flow after meeting operating and capital expenditures. Repurchased shares permanently deplete cash, so it’s crucial to avoid depleting essential liquidity.
2. Cost of Debt and Equity:
Compare the cost of repurchases to the cost of other financing options, such as debt or new equity issuance. If the cost of repurchases is lower, it may be a financially viable option.
3. Earnings Per Share (EPS) Impact:
Stock repurchases reduce the number of outstanding shares, leading to an increase in EPS. This can enhance stock prices and investor sentiment. However, it’s important to consider the long-term EPS impact, as excessive repurchases can reduce future earnings potential.
4. Debt-to-Equity Ratio:
Repurchases increase the company’s debt-to-equity ratio. It’s important to ensure that the ratio remains within acceptable levels to maintain financial stability and creditworthiness.
5. Stock Valuation:
Evaluate the stock price in relation to its intrinsic value. Repurchasing shares when they are undervalued can enhan… Read full answer
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