Question
The Internal Rate of Return (IRR) calculation plays a crucial role in stock buyback programs. It is a financial metric that is widely used in capital budgeting and corporate finance. It's essentially the discount rate that makes the net present value (NPV) of all cash flows equal to zero. In the context of stock buybacks, companies use IRR calculations to determine the profitability of repurchasing their own shares. If the IRR of a buyback program exceeds the company's cost of capital, the program can be considered a good investment. This is because it indicates that the company is able to generate a return higher than the cost to finance the buyback program.
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According to Goldman Sachs, over $504 billion dollars of stock buybacks were issued in 2021 — the most in over 22 years. Microsoft made headlines when it announced its own $60 billion dollar stock buyback program in September. So how do companies like Microsoft make the decision to deploy so much capital to stock buybacks? The answer is anIRR calculation.(Slide 8)
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