ACCA Advanced Financial Management (AFM) Practice Exam

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When could stock repurchases be viewed negatively by investors?

When the company has excess cash
When the company has poor investment opportunities
When the stock price is soaring
When the company announces a new product line

The correct answer is: When the company has poor investment opportunities

Stock repurchases can be viewed negatively by investors particularly when a company has poor investment opportunities. This stems from the perception that management is opting to buy back stock rather than investing in projects that could potentially drive growth and create value in the long term. Investors typically prefer that companies reinvest their earnings into profitable ventures or innovative initiatives rather than returning cash to shareholders when no sound growth opportunities exist. If a company lacks effective growth strategies and instead uses its resources for buybacks, it raises concerns about the company’s future prospects. Investors might wonder why management believes repurchasing shares is the best use of funds, especially if the company could be generating higher returns through strategic investments or expansion efforts. In essence, stock buybacks in this context can signal a lack of confidence in available profitable investment opportunities, which may lead to a negative perception among investors.