Share repurchase.

CFA Level I
#1

· BV per share of equity will decrease with a share repurchase if purchasing price > BV per share.

· A share repurchase is equivalent to the payment of a cash dividend of equal amount in its effect on shareholders’ wealth, all other things being equal.

Can someone explain to me why the above statements are correct?

Thanks a lot.

#2

Try some numbers:

  • Assets = $100
  • Liabilities = $60
  • Equity = $40
  • Shares outstanding = 40
  • BV/share = $40/40 shares = $1.00/sh

Suppose that you buy 20 shares at $1.50/sh (> $1.00/sh).

  • Assets = $70 (= $100 – $30)
  • Liabilities = $60
  • Assets = $10
  • BV = $10/20 shares = $0.50/sh

If you pay a dividend of $100, then shareholders have $100 in cash, but the value of their shares drops by $100. If you repurchase shares for $100, then shareholders (as a group) have $100 in cash, but the value of their shares drops by $100. The effect is the same either way.

#3

Thank you.

#4

You’re welcome.