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>one would expect the market capitalization of the company to be smaller, as the company has paid out money This doesn't make sense to me. If I spend $X to buy
by 6gvONxR4sf7o 7y ago
>one would expect the market capitalization of the company to be smaller, as the company has paid out money
This doesn't make sense to me. If I spend $X to buy a widget worth $X, I've paid out money, but I haven't net lost anything. I'm worth the same in total. If the widget is a share in a company, even my own, that shouldn't change the fact that the net change in total value is zero.
- ISL 7y agoAre shares in Apple or Berkshire worth the same to you without the companies' cash hoards?
- kgwgk 7y agoWhen a company buys its own shares it’s essentially cancelling them: they become essentially worthless. Look at if from a different angle: the ones selling the shares to the company are the shareholders. In aggregate, the shareholders own the company valued at $B (market cap) before the buyback, and the company valued at $A plus the cash paid $X after the buyback. If $A=$B they are creating $X out of thin air. Even simpler to grasp: you have a business 50/50 with a partner. There is $1m in the company account, you reach an agreement and he will sell his interest back to the company for $1mn in cash. You are sole owner now. The company doesn’t have the cash anymore. How much was the company worth before? How much is it worth now?