Corp Fin A share repurchase is a transaction in which a company buys back shares of its own common stock. Since shares are bought using a company’s own cash, a share repurchase can be considered an alternative to a cash dividend. The effect of share repurchases using borrowed funds on EPS is: If the company’s E/P is equal to the after-tax cost of borrowing, there will be no effect on EPS. If the company’s E/P is greater than (less than) the after-tax cost of borrowing, EPS will increase (decrease). Buy in the open market: Companies may repurchase stock in the open market at the prevailing market price. Buying in the open market gives the company the flexibility to choose the timing of the transaction. Buy a fixed number of shares at a fixed price: A company may repurchase stock by making a tender offer to repurchase a specific number of shares at a price that is usually at a premium to the current market price. Shareholders may tender their shares according to the terms of the offer. Repurchase by direct negotiation: Companies may negotiate directly with a large shareholder to buy back a block of shares, usually at a premium to the market price. If the firm pays more than market value for the shares, the result is an increase in wealth for the seller and an equal decrease in wealth for remaining firm shareholders. The actual payment procedure is as follows: The declaration date is the date the board of directors approves payment. The ex-dividend date is the cut-off date for receiving the dividend. The ex-dividend date is two business days before the date of record. If you buy the share on or after the ex-dividend date, you will not receive the next dividend. Holder-of-record date is the date on which the shareholders of record are designated. Date of payment is the date the dividend checks are mailed out, or when the payment is electronically transferred to shareholder accounts. Six primary factors affect a company’s dividend payout policy: Signaling effect: Unexpected changes in a company’s dividend policy are often viewed by investors as a signal from management about projections of the firm’s future performance. In other words, stockholders perceive changes in dividend policy as conveying important information about the firm. Taxation of dividends: Investors are concerned about after-tax returns. Investment income is taxed by most countries; however, the ways that dividends are taxed vary widely from country to country. The method and amount of tax applied to a dividend payment can have a significant impact on a firm’s dividend policy. Clientele effect: This refers to the varying preferences for dividends of different groups of investors, such as individuals, institutions, and corporations. The dividend clientele effect states that different groups desire different levels of dividends. Rationales for the existence of the clientele effect include: Tax considerations. Requirements of institutional investors. Individual investor preference. Restrictions on dividend payments: Companies may be restricted from paying dividends either by legal requirements or by implicit restrictions caused by cash needs of the business. Common restrictions on dividend payments include: The impairment of capital rule. Debt covenants. Cash flow. Industry life cycle. Flotation costs on new issues vs. cost of retained earnings: When a company issues new shares of common stock, a flotation cost of 3% to 7% is taken from the amount of capital raised to pay for investment bankers and other costs associated with issuing the new stock. Since retained earnings have no such fee, the cost of new equity capital is always higher than the cost of retained earnings. A company that has a sufficient amount of positive net present value (NPV) projects would prefer to fund those projects using retained earnings rather than paying a dividend and issuing new shares. Note also that flotation costs make it unprofitable for a company to fund its dividend payments by issuing new shares of stock. Shareholder preference for current income vs. capital gains: A lower tax rate for dividends compared to capital gains does not necessarily mean companies will raise their dividend payouts. Investors may not prefer a higher dividend, even if the tax rate on dividends is more favorable, for multiple reasons: Taxes on dividends are paid when the dividend is received, while capital gains taxes are paid only when shares are sold. The cost basis of shares may receive a step-up in valuation at the shareholder’s death. This means that taxes on capital gains may not have to be paid at all. Tax-exempt institutions such as pension funds and endowments will be indifferent between dividends or capital gains.
I DON’T KNOW WHAT WE’RE YELLING ABOUT! - brick tamland i already am hungover, this is way too much info. just ask me an a, b,c question already.
nice summary ditch.
Corp Fin questions are coming which pertain to the above info.
i refuse to read the top because of my pounding headache, so bring it boyeeeee.
youre a wild man ditch
Pearl City Breweries has 8 million shares outstanding that are currently trading at $34 per share. The company is choosing whether to distribute $22 million as dividends or to use the same amount to repurchase its shares. Ignoring tax effects, what will be the amount of total wealth from owning one share of Pearl City Breweries under each of these alternatives? Cash dividend Share repurchase A) $34.00 $34.00 B) $31.25 $37.00 C) $31.25 $34.00 What is the impact on shareholder wealth of a share repurchase and a cash dividend of equal amount when the tax treatment of the two alternatives is the same? A) A share repurchase is equivalent to a cash dividend of an equal amount, so total shareholder wealth will be the same. B) A share repurchase will sometimes lead to higher total shareholder wealth than a cash dividend of an equal amount. C) A share repurchase will always lead to higher total shareholder wealth than a cash dividend of an equal amount
- a - same effect regardless of method 2. a again.
- A (total wealth = SAME from both methods) 2. A (cash Div and Share repo are economically equivalent)
Your answer: B was incorrect. The correct answer was A) $34.00 $34.00 If the company pays a cash dividend, the dividend per share will be $22 million/8 million = $2.75. The value of its shares will be: So the total wealth from owning one share will be $31.25 + $2.75 = $34.00. If the company repurchases shares, it can buy $22 million/$34 = 647,058 shares. The value of one share would then be: If you remember that both a cash dividend and a share repurchase for cash leave shareholder wealth unchanged, this question does not require calculations of the amounts. Your answer: A was correct! Assuming that the tax treatment of a share repurchase and a cash dividend of equal amount is the same, a share repurchase is equivalent to a cash dividend payment, and shareholder wealth will be the same.
Pants R Us Inc.’s Board of Directors is considering repurchasing $30,000,000 worth of common stock. Pants R Us assumes that the stock can be repurchased at the market price of $50 per share. After much discussion Pants R Us decides to borrow $30 million that it will use to repurchase shares. Pants R Us’ Chief Investment Officer (CIO) has compiled the following information regarding the repurchase of the firm’s common stock: Share price at the time of buyback = $50 Shares outstanding before buyback = 30,600,000 EPS before buyback = $3.33 Earnings yield = $3.33 / $50 = 6.7% After-tax cost of borrowing = 6.7% Planned buyback = 600,000 shares Based on the information above, what will be Pants R Us’ earnings per share (EPS) after the repurchase of its common stock? A) $3.33. B) $3.28. C) $3.40. Francis Investment Inc’s Board of Directors is considering repurchasing $30,000,000 worth of common stock. Francis assumes that the stock can be repurchased at the market price of $50 per share. After much discussion Francis decides to borrow $30 million that it will use to repurchase shares. Francis’ Chief Financial Officer (CFO) has compiled the following information regarding the repurchase of the firm’s common stock: Share price at the time of buyback = $50 Shares outstanding before buyback = 30,600,000 EPS before buyback = $3.33 Earnings yield = $3.33 / $50 = 6.7% After-tax cost of borrowing = 4% Planned buyback = 600,000 shares Based on the information above, after the repurchase of its common stock, Francis’ EPS will be closest to: A) $3.36. B) $3.41. C) $3.39. Sinclair Construction Company’s Board of Directors is considering repurchasing $30,000,000 worth of common stock. Sinclair assumes that the stock can be repurchased at the market price of $50 per share. After much discussion Sinclair decides to borrow $30 million that it will use to repurchase shares. Sinclair’s Chief Executive Officer (CEO) has compiled the following information regarding the repurchase of the firm’s common stock: Share price at the time of buyback = $50 Shares outstanding before buyback = 30,600,000 EPS before buyback = $3.33 Earnings yield = $3.33 / $50 = 6.7% After-tax cost of borrowing = 8.0% Planned buyback = 600,000 shares Based on the information above, Sinclair’s earnings per share (EPS) after the repurchase of its common stock will be closest to: A) $3.32. B) $3.18. C) $3.23.
Your answer: A was correct! Your answer: A was correct! Your answer: A was correct! Equations didn’t paste.
Which of the following is least likely a method by which firms repurchase their shares? A) Exercise a call provision. B) Tender offer. C) Direct negotiation. Jim Davis and Thurgood Owen, two equity analysts at Ferguson Capital Management, were reviewing the financial statements of Peregrine Foodstuffs Ltd. Davis and Owen noticed that Peregrine has been repurchasing its common shares in the market over the past three years. Owen thought this was an important issue to look into in greater detail. Upon completion of his review, Owen made the following two statements: Statement 1: Peregrine has bought back shares in the open market during its repurchase program. This method of repurchase gave the company the flexibility to choose the timing of the transaction. Statement 2: Peregrine plans to buy back shares by making tender offers during the coming year. By making tender offers, the company will be able to repurchase shares at a discount to the prevailing market price. With respect to Owen’s statements: A) both are correct. B) both are incorrect. C) only one is correct.
- A (EY = ATCOD) 4. A 5. A 6. A (A is not even an option to buyback) 7. C (S1 = CORRECT, S2 = FALSE)
Your answer: A was correct! Call provisions are not relevant to common stock and are not considered a repurchase in any case. There are three repurchase methods. The first is to buy in the open market. A company may repurchase stock by making a tender offer to repurchase a specific number of shares at a price that is usually at a premium to the current market price. The third way is to repurchase by direct negotiation. Companies may negotiate directly with a large shareholder to buy back a block of shares, usually at a premium to the market price. Your answer: C was correct! Buying in the open market gives the company the flexibility to choose the timing of the transaction. Thus, Statement 1 is correct. A second way is to buy a fixed number of shares at a fixed price. A company may repurchase stock by making a tender offer to repurchase a specific number of shares at a price that is at a premium to the current market price. They would not be willing to tender their shares for less than the prevailing market price, so Statement 2 is incorrect.
AAA
Shareholders selling shares between the ex-dividend date and date of record: A) forfeit the dividend, with the proceeds staying with the company. B) receive the dividend. C) forfeit the dividend, with the proceeds going to the buyer. Which of the following shows the key dividend dates in their proper sequence? A) Declaration date, holder-of-record date, ex-dividend date, payment date. B) Ex-dividend date, holder-of-record date, declaration date, payment date. C) Declaration date, ex-dividend date, holder-of-record date, payment date.
[3.33x30600000]-(After tax debt cost x30,000,000)/30,000,000 should be the AAA answer format
- B (receive the dividend as t(settlement) = t +3) 9. C (DD-XDD-HOR-PD)
- a 2. a 3. a oops that was from the 2nd set. you guys are too fast for me