karoliukas

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.

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The board of directors announce the amount of the dividend, the holder-of-record date, and payment date. The ex-dividend date is two business days prior to the holder-of-record date, giving the firm time to identify the rightful owner of the dividends.

karoliukas

Which justification for repurchasing stock is the least valid?

A) Repurchases offer shareholders more choices than cash dividends.

B) Shareholders prefer capital gains to cash dividends.

C) A cash dividend increase, in response to short-term excess cash flows, may confuse investors.

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Some shareholders prefer capital gains, while others prefer dividends. Repurchases offer shareholders the choice of tendering or not tendering their stock, while cash dividends represent a payment they cannot refuse. Raising dividends is often seen as a positive signal, but an increase funded by short-term cash flows may not be sustainable, forcing the company to reduce the dividend later.

karoliukas

Which of the following statements about a stock repurchase is least accurate?

A) A stock repurchase occurs when a large block of stock is removed from the marketplace.

B) Management can distribute cash to shareholders without signaling about future earnings.

C) Disgruntled stockholders are forced to sell their shares, improving management's position.

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A repurchase gives stockholders a choice. They can sell or not sell.

karoliukas

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.

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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.

karoliukas

Which of the following is least likely a method by which firms repurchase their shares?

A) Tender offer.

B) Direct negotiation.

C) Exercise a call provision.

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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.

karoliukas

Laura’s Chocolates, Inc. (LC), is a maker of nut-based toffees. LC is considering a share repurchase and prefers the “tender offer” method. Which of the following is also known as a “tender offer”?

A) Buying a fixed number of shares at a fixed price.

B) Buying in the open market.

C) Repurchasing by direct negotiation.

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A tender offer refers to buying a fixed number of shares at a fixed price (usually at a premium to the current market price).

karoliukas

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) $3.28.

B) $3.40.

C) $3.33.

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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.

karoliukas

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.

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Total earnings = $3.33 × 30,600,000 = $101,898,000


Since the after-tax cost of borrowing of 4% is less than the 6.7% earnings yield (E/P) of the shares, the share repurchase will increase Francis’s EPS.

karoliukas

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) $3.18.

B) $3.32.

C) $3.23.

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Total earnings = $3.33 × 30,600,000 = $101,898,000

Since the 8.0% after-tax cost of borrowing is greater than the 6.7% earnings yield (E/P) of the shares, the share repurchase reduces Sinclair’s EPS.

karoliukas

The share price of Solar Automotive Industries is $50 per share. It has a book value of $500 million and 50 million shares outstanding. What is the book value per share (BVPS) after a share repurchase of $10 million?

A) $10.12

B) $10.00.

C) $9.84.

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The share buyback is $10 million / $50 per share = 200,000 shares.
Remaining shares: 50 million − 200,000 = 49.8 million shares.
Solar Automotive Industries’ current BVPS = $500 million / 50 million = $10.
Book value after repurchase: $500 million − $10 million = $490 million.
BVPS = $490 million / 49.8 million = $9.84.
BVPS decreased by $0.16.

Book value per share (BVPS) decreased because the share price is greater than the original BVPS. If the share prices were less than the original BVPS, then the BVPS after the repurchase would have increased.