A firm is likely to repurchase stocks when:

A firm is likely to repurchase stocks when:

• A. Sales are declining
• B. Cash reserves are high
• C. Market conditions are unstable
• D. New equity is being issued

Answer: (B)

When a firm decides to repurchase its stocks, having high cash reserves is a significant motivating factor. A company may use its excess cash to buy back shares as a way to return value to shareholders. This action can signal to the market that the management believes the stock is undervalued, potentially boosting the share price. Additionally, repurchasing shares can improve financial metrics such as earnings per share (EPS) since fewer shares are outstanding. Having cash reserves also allows a company to execute a buyback without impairing its operational liquidity. Firms with strong cash positions can strategically reinvest in their business or address other financial needs while also returning capital to shareholders through share repurchases. In contrasting scenarios, declining sales could indicate that a company may need to conserve cash rather than spend it on buybacks. Instability in market conditions could create uncertainty around the firm’s future performance, making stock repurchases less desirable. Similarly, when new equity is being issued, it typically indicates a need for capital infusion rather than the presence of excess cash for shareholder returns. Thus, high cash reserves clearly position a firm to consider stock repurchases as a viable strategy.

When a firm decides to repurchase its stocks, having high cash reserves is a significant motivating factor. A company may use its excess cash to buy back shares as a way to return value to shareholders. This action can signal to the market that the management believes the stock is undervalued, potentially boosting the share price. Additionally, repurchasing shares can improve financial metrics such as earnings per share (EPS) since fewer shares are outstanding.

Having cash reserves also allows a company to execute a buyback without impairing its operational liquidity. Firms with strong cash positions can strategically reinvest in their business or address other financial needs while also returning capital to shareholders through share repurchases.

In contrasting scenarios, declining sales could indicate that a company may need to conserve cash rather than spend it on buybacks. Instability in market conditions could create uncertainty around the firm’s future performance, making stock repurchases less desirable. Similarly, when new equity is being issued, it typically indicates a need for capital infusion rather than the presence of excess cash for shareholder returns. Thus, high cash reserves clearly position a firm to consider stock repurchases as a viable strategy.