I know the formula for EPS After Stock Buyback is (Total Earnings-After-Tax Cost of Funds)/# of shares remaining but they don’t use that formula in this problem to calculate EPS after buyback? Why not? "Northern Financial Co. has BVPS of $5.00. The company has anounced a $15 million share buyback. The share price is $60 and the company has 40 milliion shares outstanding. After the share repurchase, the company’s BVPS will be closest to: A. $4.65 B. $4.90 C. $5.03 So when do you use this formula to calculate EPS?

Shoot I posted the wrong problem! Here is the right one:

Earnings $56 Million, wish to repurchase $20 million worth of shares. Shares outstanding: 40 million Current stock price: $28 52-week trading range: $20-$36 Book Value of Equity: $880 million After-tax cost of borrowing: 5.5% Calculating EPS after buyback (in order to calculate EPS), they don’t use the formula for EPS after buyback, which uses the after-tax cost of borrowing. It’s just there to throw you off, I guess. Why don’t you need it? -Richard

EPS before buyback: 56/40 = 1.4 EPS after buyback: (56-20) / (40+20/28) = .884 ? The after tax cost of borrowing is when they are borrowing from the market to repurchase the shares. So then they have to reduce the interest on the borrowing from the EPS…

So when do you “reduce the interest on the borrowing from the EPS” and when do you not need to? By the way, book says EPS after buyback is $1.43 ($56 million/39,285,714 shares). You get 39,285,714 shares because the share buyback is $20 million/$28 per share=714,286 share bought back, so you subtract 714,286 from 40 million to get the shares you are left with, 39,285,714 (their explanation). -Richard

ok… the # of shares is right. I am making too many of these mistakes today… but isn’t # of the numerator to be reduced to 36 Million? since they are using the earnings itself to make the share repurchase? which book (Schweser/text) and which page # is this on?

Yeah - I think the numerator should be 36M as well unless we are missing some piece of info

Here’s what I got: 20MM / $28 = 714,286 shares repurchased 56MM - (20MM * .055) = 54.9MM 54.9MM / (40MM - 714,286) = 1.397 ---- I thought we subtracted the cost of borrowing from the numerator?

it depends, doesn’t it - on whether fresh borrowing was made for the 20 Million, or if the 20 million came out of the 56 million. if 20 mill came from 56 million it would be 36/(40-.714286) else it would be like you have calculated.

Ah, I see your point. So for the question above, I’m assuming there’s a piece of information that we’re missing regarding where this 20MM is coming from… rellison - Could you post book and page # of this question. Thanks.

It’s on page 116, Book 3 (Corporate Finanance and Portfolio Management) in Schweser.

Q6 (pg 115) Clearly says that BoD’s wanted to share the profit from an excellent year. The earnings in this excellent year were 56m and they wanted to distribute 20m as a. cash dividends or b. repurchase stock worth of 20m. So it means that 20m were home grown and not borrowed. So ATCoB, 52-week range and all that were Schwerser shenanigans. Now, Earnings = 56m NOSO = 40m EPS=1.4 P/E = 20x Total Market Cap = 40m*28 = 1120 After distributing 20m -> new Marjet Cap = 1120 - 20 = 1100 Total money to buy shares @28 from market = 20m No of shares that can be brought with that kind of money = 71428.57 Remaning NOSO = 40 - 0.71428 = 39.28572 New Stock price = new Market Cap/new NOSO = 1100/39.28572 = 28 New EPS = 56/new NOSO = 56/39.28572 = 1.425 new P/E = 28/1.425 = 19.65x

In general, financing activities (except interest – an exception) don’t factor into earnings. For example, you don’t reduce NI by the amount of dividend or share repurchase. As another, when you issue a bond, you don’t credit the cash proceeds as income. Distribution of profits to shareholders isn’t an expense. So under no circumstance would you subtract 20m from earnings as part of an EPS calculation.

You’d subtract it from the market capitalization of the company, which is the reduction by the dividend amount (this is theoretical, of course)

I got this number too. But cpk is right, it really depends if they bought the shares back from earnings or borrowed funds. jdane416 Wrote: ------------------------------------------------------- > Here’s what I got: > > 20MM / $28 = 714,286 shares repurchased > > 56MM - (20MM * .055) = 54.9MM > > 54.9MM / (40MM - 714,286) = 1.397 > > ---- > I thought we subtracted the cost of borrowing from > the numerator?

Ahh ok. So if shares are borrowed, use the formula. Kewl