example 6-6
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Clayman, Fridson, Troughton. Corporate Finance 2ed
1
Given
• Net income = Y100 million
• Idle cash = Y240 million
Solution
• Current EPS = Y100 million/10 million shares = Y10
• Shares repurchased = Y240 million/Y140 =~ 1.7 million shares
• Shares after repurchase = 10 M - ~1.7 M =~ 8.3 million shares
• EPS after repurchase = Y100 million/~8.3 M = ~Y12
Example 6-6
• Current share price = Y120
• Repurchase price = Y140• Shares outstanding = 10
million
Clayman, Fridson, Troughton. Corporate Finance 2ed
2
Given– Funds available for distribution = $50 million– Current share price = $20– Shares outstanding = 10 million– Two methods for distributing the free cash flow to
equity:• Pay a special $5/share cash dividend• Repurchase $50 million worth of shares at the current
market price
– Taxation and information content of dividends and repurchases are the same
– What is the impact on shareholder wealth under each method?
Example 6-9
Clayman, Fridson, Troughton. Corporate Finance 2ed
3
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 same• Market value of equity before the dividend = 10
million x $20 = $200 million• Market value of equity after the dividend = $200 M -
$50 M = $150 M• Market value per share after the dividend = $150
M/10 M = $15• Or, $20 - $5 = $15
– Effect on wealth of shareholders (on a per share basis) = $5 (dividend) + $15(stock price)
4
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 repurchased• Shares repurchased = $50 M/$20 = 2.5 million
shares• Shares outstanding after the repurchase = 10 – 2.5
= 7.5 M• Market value of equity before the repurchase = $20
x 10 million = $200 million• Market value of equity after the repurchase = $200
million - $50 million = $150 million• Price per share = $150 million/7.5 million shares =
$20
– Effect on shareholder wealth (on a per share basis) = $20
Clayman, Fridson, Troughton. Corporate Finance 2ed
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