Heads-Up18: Share repurchase

Cash, 25,000,000

Share price 40.00

Shares outstanding (prior to transaction) 20,000,000

ABC decides to spend $20 million repurchasing common stock. What is the value of a share of stock after the share repurchase?

A 40.00.

B) 41.00.

C) 45.00.

A? FCFE isn’t affected by share repurchases?

A) 40$

20 000 000 * 40 = 800 000 000

800 000 000 - 20 000 000 cash = 780 000 000

you bought back 20 000 000/40 = 500 000 shares

780 000 000/ 19 500 000 = 40

A) based on the facts given, share repurchases don’t change the stock price.

however realistically the price would probably increase because the EPS would then be greater and the PE would be lower. a lower PE could cause some buying pressure on the stock and its price to rise until it was at the previous PE

B: 41

Bot back 500K shares (20m/40). Shares outstanding = 19.5m

800M/19.5M = 41

where did the cash go?

well i gave my share for 0$.

was that a facebook repurchase?

The answer is $40…and it’s easy to memorize this for the exam, but …

The reason I asked this is that I figured that a share repurchase is just like paying a cash dividend, but it isn’t. Here they buy back some of my shares and they pay me with cash, but now I have less shares So my net worth is the same (more cash but less shares). With dividends the price drops by the amount of the dividend, and you still have your full shares (more cash but price must go down).

well my AR(1) models tells me that FB mean-revert levels is 0 and converging fast.

Dreary, Keep bring in the Heads up, you know we like it. :slight_smile:

lmao facebook.