CAPITAL GEARING

Buying back of shares and Increasing Capital Gearing



Introduction2

Discussion3

Buying Back of Shares3

Method of Buying Back of Shares4

Objectives of the Buy Back Strategy4

Capital Gearing5

Effects of Buyback and increasing financial gearing on Financial Entities6

Debt Level7

Net income7

Lack of Investors7

Lack of Capital8

High Fixed Cost8

Risk of bankruptcy9

Lack of access9

Conclusion12

References14

Buying back of shares and Increasing Capital Gearing

Introduction

This study focuses on the buying back of shares and its negative impacts on the company's capital gearing ratio. Buying back strategy is defined as re-purchase strategy of the company in order to by its own shares. The share is financed through the use of the use of the debt which is taken from the different creditors in the market. These creditors can be bank, any investment company, or any other financial institution. The organizations buy back its own shares because of the three reasons. First, the organization buys back the shares in order to increase the prices of its own stock. Second, the organization use buy back strategy in order to avoid the over capitalization. Third, the organization uses the buyback strategy in order to defend the company's share from the competitor attempt (Dittmar,, 2000, Pp. 331-355.

While, the capital gearing ratio is define as the solvency ratio of the organization which is used for analyzing the capital structure of the firm. The term capital structure is referred to the long term financing activity of the organization which is related to the long term debenture, preferred stock, ordinary stock, reserves and surplus. Capital gearing ratio is used for the calculation of long term financial position of the organization. Normally, the capital gearing ratio is the relationship between the equity shares and the preferred share of the organization. This relation also includes such long term equity which has the interest bearing loans. Capital gearing ratio is also referred to the fixed interest bearing with the non fixed interest bearing loans and the funds both (Bevan and Danbolt, 2002, 159-170).

This study focuses on the buying back strategy of the organization and its negative impact on the capital gearing ratio of the organization. As, the organization used the buying back strategy for buying its shares and stock from the market in order to secure the organization from the competitors so therefore return of the stock increase the capital gearing ratio because of the high amount of debt. The organization uses buy back strategy through the use of the long term debt which increases the debt burden on the organization.

Discussion

Buying Back of Shares

Buying back is the capital restructuring process which includes the repurchase of the equity shares of the organization. Buying back is the financial strategy that increases the equity shares, preferred shares and other securities of the organization. According to the today's changing environment, the organization all around the globe needs high amount of freedom in order to restructuring the debt equity restructuring through its own ways. The organization use its own ways of the buying back strategy in order to use the favourable environment of the stock market and reduces the ...