Net income Y100 million Idle cash Y240 million Solution Current EPS Y100 million10 million shares Y10 Shares repurchased Y240 millionY140 17 million shares Shares after repurchase 10 M 17 M 83 million shares ID: 387816
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Slide1
Given
Net income = Y100 millionIdle cash = Y240 million
Solution
Current EPS = Y100 million/10 million shares = Y10Shares repurchased = Y240 million/Y140 =~ 1.7 million sharesShares after repurchase = 10 M - ~1.7 M =~ 8.3 million sharesEPS after repurchase = Y100 million/~8.3 M = ~Y12
Example 6-6
Current share price = Y120Repurchase price = Y140Shares outstanding = 10 million
1
Clayman, Fridson, Troughton. Corporate Finance 2edSlide2
Given
Funds available for distribution = $50 millionCurrent share price = $20Shares outstanding = 10 millionTwo methods for distributing the free cash flow to equity:
Pay a special $5/share cash dividendRepurchase $50 million worth of shares at the current market priceTaxation and information content of dividends and repurchases are the same
What is the impact on shareholder wealth under each method?Example 6-9
2
Clayman, Fridson, Troughton. Corporate Finance 2edSlide3
Solution (cash dividend)
a cash dividend reduces the market value of equity by the amount of the dividend; the number of shares outstanding remain the sameMarket value of equity before the dividend = 10 million x $20 = $200 millionMarket value of equity after the dividend = $200 M - $50 M = $150 M
Market value per share after the dividend = $150 M/10 M = $15Or, $20 - $5 = $15Effect on wealth of shareholders (on a per share basis) = $5 (dividend) + $15(stock price)
3Clayman, Fridson, Troughton. Corporate Finance 2edSlide4
Solution (repurchase)
A share repurchase has no effect on the stock price (see assumptions); the total shares outstanding will be reduced by the number of shares repurchasedShares repurchased = $50 M/$20 = 2.5 million sharesShares outstanding after the repurchase = 10 – 2.5 = 7.5 M
Market value of equity before the repurchase = $20 x 10 million = $200 millionMarket value of equity after the repurchase = $200 million - $50 million = $150 millionPrice per share = $150 million/7.5 million shares = $20
Effect on shareholder wealth (on a per share basis) = $204
Clayman, Fridson, Troughton.
Corporate Finance 2ed