Session 11: Corporate Finance
Reading 47: Dividends and Share Repurchases: Basics
LOS d: Calculate and compare the effects of a share repurchase on earnings per share when 1) the repurchase is financed with the company's excess cash and 2) the company uses funded debt to finance the repurchase.
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?
Total earnings = $3.33 × 30,600,000 = $101,898,000
Since the after-tax cost of borrowing of 6.7%% is equal to the 6.7% earnings yield (E/P) of the shares, the share repurchase has no effect on Pants R Us’ EPS.
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发表于 2011-3-24 14:38
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