What happens when a company buys its own shares?

Question

Why does this reduce capital, and why does this reduce the company’s ability to pay creditors?

In: 141

Answer 1

If you have 100 dollars to pay your bills this month but you spend that cash and buy 100 dollars of candy, you no longer have that money to pay any bills.

Capital, in this example is just money (or an asset that can be quickly turned into money). So turning cash into candy reduces your capital.