Are we supposed to use just share repurchases in the deonminator, along with dividends? Or repurchases net of new issues?
FCFE / (divs + share repurchases)
This is a good question but I haven’t seen it in the CFA curriculum so far so I’m not sure we’d need to know this. I’ve used Div and Share repurhcased only in the denominator for my job because the cash flow from issuing equity isn’t necessarily sustainable. If we’re doing a valuation model and they’ve issued equity we’d want to assume a stable FCFE so I would personally exclude it, and they wouldn’t want us running a FCFE with altering capital structure on the test. This isn’t a CFA certified answer though, just musings…Stunner has the formula I’ve used and memorized
In real world, isn’t that one crazy company goes to banker and issues shares just to buy it back later (within a year)?
Even the ratio didnt capture this crazy act, I really need to know why they are doing this.
Maybe they expect the price to drop so they can buy back the same amount of shares at a lower price, essentially shorting their own security. Or maybe they’re trying to hold on to a target capital structure and finance a growth project. Is this real/recent? I’m surprised they didn’t just issue debt to buy back the shares, High Yield bonds are under 5%.
Shorting own stocks and ripping off shareholders? Sounds like corporate governance issue…besides a costly, can this really happen?
Shares buyback and new issue have opposite effects on leverage. Why they want to do it?
If they need money to finance a project, they wouldn’t have the money anymore to buy back shares, right?
They can certainly issue debt to pay shareholders but its unsustainable.
Yeah, I guess I agree with you that to exclude new issues in the ratio as its unsustainable…
It can definitely happen, public companies can be pretty bad sometimes. Even buffet admits that he is willing to raise equity when his company’s equity is grossly over-valued. If the market is willing to give you more money than what your asset is worth then why not? It’s free cash and realizing value.
My idea with the issuing of a new project is maybe they have been working on something and they expect a windfall of cash in order to pay back shareholders but it isn’t due to complete until maybe 2 or three quarters from now. So they issue equity, fund a new project they’re looking to finance in the mean time, and then complete the buyback plan with the cash from the old project’s profits in the next couple of quarters. Perhaps there are covenants forcing this to be the way they raise capital since their leverage ratios are maxed out for the next couple quarters.
Another idea I had is that sometimes there are pricing or volume requirements to stay on an exchange such as the NASDAQ or NYSE. Maybe the company is issuing the shares in order to stimulate the trading volume required the stay on the exchange as they buy-back their shares. This may constitute market manipulation but I doubt that it is unfoudned.