Common stock repurchase and market signalling

In the open market share repurchase, the firm may or may not declare the repurchase. Depending on the market condition and the firm’s position in the industry, the firm can decide when and how many

First, a large share repurchase will significantly increase shareholders’ percentage ownership of BKI. BKI has been under levered for decades. The company acquisitions of several small manufacturers made shareholders’ equity be diluted even more. In other words, shareholders, especially the main shareholders in Blaine’s board, are paying for BKI’s over-liquidity. This share repurchase will not only give the board more flexibility to allot dividends, but will lead to a stable development of BKI’s business in the long run.

Evaluate the decision from the perspective of BBBY’s shareholders: does the proposed repurchase program increase shareholder’s value? Provide some calculations to illustrate your answer. The repurchase program increases the shareholder’s value. This is because of a rise in the price of the shares of the original shareholders.

b. If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market, what is the price of the shares once the

When companies set out to repurchase shares of its own stock, they are generally thinking that doing so will increase earnings per share rather than having a direct effect on its sales. In other words, there is no direct relationship on a company's sales if they decide to repurchase their stock. However, there are potential tax savings to shareholders. Companies can do a few things when providing value to their shareholders, they can either pay a dividend, which is a certain amount per share, per quarter, that puts money back into the investors original investment, or they can decide to repurchase their own stock, boosting earnings per share and the potential for their stock to grow exponentially because the number of shares outstanding is reduced.

Firstly, the goal of the share repurchase is maximum the shareholder’s value rather than paying dividend.

By repurchasing stock rather than offering shareholders a higher dividend, investors will benefit from the comparatively lower capital gains tax (which can be deferred indefinitely) rather than being forced to pay a higher income tax on dividends received. By reducing the total number of shares available, the value

Valuation enhancement and alternative options Valuation enhancement Management considering share repurchase program should weigh its benefit of financial discipline, efficient corporate strategy implementation and utilization of tax shield against the downside of cost of financial distress. It’s not the possibility of bankruptcy that causes concerns among equity holders regarding extent of leverage but the direct costs (legal, liquidation, administrative etc.) and indirect costs (deteriorated corporate image, management time and attention, agency costs of value-destructing investment, distress asset sales etc.). Exhibit 4 lists the key assumption inputs of approximating quantitative firm value/ equity value accretion. Levering UST to a larger extent by adding $1,000m does increase firm value.

The issue: Grand Metropolitan PLC is the world’s largest wine and spirits seller. It mainly operated in London, USA. In 1991, it beats market expectation with a 4.8% increase in pretax profits, and the company Chairman stated that company’s goal “to constantly improve on”. Despite the great performance in the world recession in 1991, the price of GrandMet shares was 10% below the average price/earnings ratio of the companies in the Standard & Poor’s 500 index. And more important, rumors had that GrandMet, valued at more than $14 billion in the stock market, maybe a takeover target. The management dilemma is to understand why the company’s stock is traded below of what considered being the right price and whether the company is truly

Summary We considered the impact of a share repurchase program for a fictional company – Blaine Kitchenware, Inc.

Investors value the stock based on the size of future cash flows from the company. Another indicator that the stock will go up is the size of the income per share. According to Wal-Mart’s statements, in 2005 the net income per share was $2.41, in 2006 that number went up to $2.68, in 2007 it went up again to $2.71, in 2008 it went up to $3.13 and in 2009 to $3.39 (Wal-Mart, 2009). Another interesting fact that may contribute to a rise in price of the stock as a result of a repurchase is to look at the gain for the remaining stockholders from a different view (that may be a little unorthodox). In 2005, before the repurchasing the net income was $10,267 and in 2009 after the repurchasing it was $13,400, which is an increase of

If management is conducting the repurchase due to their belief that the stock is undervalued and this belief is correct, the market cap should eventually rise to their estimation. This market cap rise would combine with the new lower number of shares outstanding, resulting in an even higher stock price.

The second method to distribute extra cash is through a share repurchase. Share repurchase means a company buys its shares back from the market or from those shareholders who are willing to tender such shares. The buyback methodology is used primarily when companies such as Ford believe that their share price is undervalued. Buying back its stock will help Ford to increase its share price by promoting greater interest in its stock. However, we cannot effectively increase company’s liquidity through a conventional share repurchase. And also for traditional stock buyback, it usually will take years of time to executive. In Ford case, stock buyback option will put Ford’s family’s voting power in the company at risk.

Finance Technical Interview Questions |Corporate Finance

MODERN FINANCE CAPITAL STRUCTURE The capital structure of a company refers to the mixture of equity