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Example 6-6

Example 6-6. Given. 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. Current share price = Y120

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Example 6-6

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  1. Example 6-6 Given 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 • Current share price = Y120 • Repurchase price = Y140 • Shares outstanding = 10 million • Net income = Y100 million • Idle cash = Y240 million Clayman, Fridson, Troughton. Corporate Finance 2ed

  2. Example 6-9 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? 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) Clayman, Fridson, Troughton. Corporate Finance 2ed

  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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