Shareholder Wealth Change in Share Repurchases
I am confused by a Kaplan Mock question:
“If the board proceeds with Nelson’s proposed stock repurchase plan as suggested, which of the following is least likely to be true? MavsHD:
A) would be increasing financial leverage.
B) is trying to signal the market that despite the declining share price, future prospects for the company are good.
C) will reduce the wealth of all shareholders, including those who tender their shares for repurchase if the repurchase price is at a premium to the current stock price.”
I got the right answer as (A) and (B) are both true, but for the wrong logic. My understanding is that the impact on shareholder wealth (measured in this instance in BVPS) is related to the excess of the purchase price over book value per share, not current market price.
For example, if the shares were trading at 0.8x BV and the repurchase took place at 0.9x BV, that’s a premium to the market price but still a discount to the book value so I would think the BVPS still goes up? Because ultimately your balance sheet doesn’t know what the market is valuing your shares at?
Thanks for any explainers.
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