Documente Academic
Documente Profesional
Documente Cultură
Repurchases ?
Activity in which company
make a repurchase or buy
back of their stock that have
been circulated in the stock
market that has been
owned by stockholders
Reasonas Why do
Stock Repurchases
1. Firm has excess cash
2. Preventing corporate takeover
due to majority share purchase
3. Has plans to consolidate with
other companies
4. Execute large capital structure
change
3 Way of Share
repurchases
1. Open market
purchases
2. Tender Offer
3. Targeted repurchase
Cash dividend vs
Repurchase
Cash dividends vs Repurchase
For example, theres a company with
excess cash of $300,000. The firm pays no
dividends,
and its net income for the year just ended
is $49,000. The market value balance
sheet at the end of the year is represented
here:
There are 100,000 shares outstanding.
The total market value of the equity is $1 million,
so the stock sells for $10 per share.
Earnings per share (EPS) are 100,000/$.49=
$49,000
The priceearnings ratio (PE) is $10/0.49 =20.4.
1st option -> the company is considering is a
$300,000/100,000 = $3 per share extra cash
dividend.
2nd option-> the company using the money to
repurchase $300,000/10 = 30,000 shares of stock.
However, If commissions, taxes, and other
imperfections are ignored in our example, the
stockholders shouldnt care which option is chosen.
1st option : The firm is paying out $300,000 in cash
If the cash is paid out as a dividend, there are still 100,000 shares
outstanding, so each is worth $7.
The fact that the per-share value fell from $10 to $7 is not a
cause for concern. Consider a stockholder who owns 100 shares.
At $10 per share before the dividend, the total value is $1,000.
After the $3 dividend, this same stockholder has 100 shares
worth $7 each, for a total of $700, plus 100 x$3=$300 in cash, for
a combined total of $1,000.
A cash dividend doesnt affect a stockholders wealth if there are
no imperfections
Also, because total earnings and the number of
shares outstanding havent changed,
EPS is still 49 cents. The priceearnings ratio,
however, falls to $7 /.49 =14.3.
2nd option : the company repurchases 30,000 shares,
there are 70,000 left outstanding