Stock repurchases occur when a company buys its outstanding stock which is often referred to as treasury stock and is reported as a negative value on the company’s balance sheet. In a share repurchase, firms use excess cash to buy shares back from investors. These shares are to be held in the corporate treasury and resold if the company needs money. There are several approaches to conducting share repurchases. Consider the following situation: The firm announces a standing offer to buy a fixed number of shares at a specified price, and investors choose whether they’d like to accept the offer. What method is described in the preceding situation? Open-market transaction Auction Tender offer Direct negotiation In a taxless world with no brokerage costs, repurchases and dividends have the same effect on shareholder wealth. In the real world, however, repurchases provide more preferable tax treatment than dividends to ordinary investors. Does this mean that firms should always use share repurchases so that investors can gain from this tax benefit? No Yes In general, are stock repurchases a feasible substitute for the payment of cash dividends? In other words, will a firm either pay a cash dividend or repurchase its shares, but never do both? No Yes