example 6-6

Clayman, Fridson, Troughton. Corporate Finance 2ed

1

Given

• Net income = Y100 million

• Idle cash = Y240 million

Solution

• Current EPS = Y100 million/10 million shares = Y10

• Shares repurchased = Y240 million/Y140 =~ 1.7 million shares

• Shares after repurchase = 10 M - ~1.7 M =~ 8.3 million shares

• EPS after repurchase = Y100 million/~8.3 M = ~Y12

Example 6-6

• Current share price = Y120

• Repurchase price = Y140• Shares outstanding = 10

million


2

Given– Funds available for distribution = $50 million– Current share price = $20– Shares outstanding = 10 million– Two methods for distributing the free cash flow to

equity:• Pay a special $5/share cash dividend• Repurchase $50 million worth of shares at the current

market price

– Taxation and information content of dividends and repurchases are the same

– What is the impact on shareholder wealth under each method?

Example 6-9


3

Solution (cash dividend)– a cash dividend reduces the market value of

equity by the amount of the dividend; the number of shares outstanding remain the same• Market value of equity before the dividend = 10

million x $20 = $200 million• Market value of equity after the dividend = $200 M -

$50 M = $150 M• Market value per share after the dividend = $150

M/10 M = $15• Or, $20 - $5 = $15

– Effect on wealth of shareholders (on a per share basis) = $5 (dividend) + $15(stock price)

4

Solution (repurchase)– A share repurchase has no effect on the stock

price (see assumptions); the total shares outstanding will be reduced by the number of shares repurchased• Shares repurchased = $50 M/$20 = 2.5 million

shares• Shares outstanding after the repurchase = 10 – 2.5

= 7.5 M• Market value of equity before the repurchase = $20

x 10 million = $200 million• Market value of equity after the repurchase = $200

million - $50 million = $150 million• Price per share = $150 million/7.5 million shares =

$20

– Effect on shareholder wealth (on a per share basis) = $20


example 6-6

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