What is Stock

Repurchases ?
Activity in which company
make a repurchase or buy
back of their stock that have
been circulated in the stock
market that has been
owned by stockholders
 Reasonas Why do
Stock Repurchases
1. Firm has excess cash
2. Preventing corporate takeover
due to majority share purchase
3. Has plans to consolidate with
other companies
4. Execute large capital structure
change
3 Way of Share
repurchases
1. Open market
purchases
2. Tender Offer
3. Targeted repurchase
Cash dividend vs
Repurchase
Cash dividends vs Repurchase
For example, theres a company with
excess cash of $300,000. The firm pays no
dividends,
and its net income for the year just ended
is $49,000. The market value balance
sheet at the end of the year is represented
here:
 There are 100,000 shares outstanding.
The total market value of the equity is $1 million,
so the stock sells for $10 per share.
Earnings per share (EPS) are 100,000/$.49=
$49,000
The priceearnings ratio (PE) is $10/0.49 =20.4.
 1st option -> the company is considering is a
$300,000/100,000 = $3 per share extra cash
dividend.
2nd option-> the company using the money to
repurchase $300,000/10 = 30,000 shares of stock.
However, If commissions, taxes, and other
imperfections are ignored in our example, the
stockholders shouldnt care which option is chosen.
 1st option : The firm is paying out $300,000 in cash

If the cash is paid out as a dividend, there are still 100,000 shares
outstanding, so each is worth $7.
The fact that the per-share value fell from $10 to $7 is not a
cause for concern. Consider a stockholder who owns 100 shares.
At $10 per share before the dividend, the total value is $1,000.
After the $3 dividend, this same stockholder has 100 shares
worth $7 each, for a total of $700, plus 100 x$3=$300 in cash, for
a combined total of $1,000.
A cash dividend doesnt affect a stockholders wealth if there are
no imperfections
 Also, because total earnings and the number of
shares outstanding havent changed,
EPS is still 49 cents. The priceearnings ratio,
however, falls to $7 /.49 =14.3.
 2nd option : the company repurchases 30,000 shares,
there are 70,000 left outstanding

The company is worth $700,000 again, so each remaining

share is worth $700,000/70,000 =$10. Our stockholder with
100 shares is obviously unaffected

Our stockholder with 100 shares is obviously unaffected. For

example, if she was so inclined, she could sell 30 shares and
end up with $300 in cash and $700 in stock, just as she has if
the firm pays the cash dividend.
 In this second case, EPS goes up because total
earnings remain the same while the number of
shares goes down. The new EPS is $49,000/ 70,000
= $.70. However, the important
thing to notice is that the PE ratio is $10/.70 = 14.3
This example illustrates the important point that, if
there are no imperfections, a cash dividend and a
share repurchase are essentially the same thing.
 A Repurchase wouldnt change the
price or the value of each share

Excess Cash $300.000 Debt $0

Other Assets $700.000 Equity $1.000.000
Total $1.000.000 Total $1.000.000

Excess Cash $0 Debt $0

Other Assets $700.000 Equity $700.000
Total $700.000 Total $700.000
 The tax treatment
A cash dividend is taxed
A repurchase is taxed only if:
The shareholder has a capital
gain on the sale of the stock
For the $1 dividend per share is taxed at
28%
If the shareholder has 100 shares, he
should pay: 100 x 0.28 = $28

If the shareholder choose to repurchase the

stock and it sold at $100 and it were
originally purchased at $60
The share holder will get $40 of gain
He should pay the tax at: 0.28 x $40 = $11.20
Dividends and Dividend Payers
 There are numerous good reasons favoring a dividend policy
of low (or no) payout
While we know dividends are large in the aggregate, we also
know that the number of companies that pay dividends has
declined
Dividend payments are heavily concentrated in a relatively
small set of large rms 80 percent of aggregate dividends
were paid by just 100 rms
One important reason that the percentage of dividend-
paying rms has declined is that the population of rms has
changed
Another factor at work is that ms appear to be more likely
to begin making payouts using share repurchases, which are
exible, rather than committing to making cash distributions
 A second force that may be at
work over time is the maturing
of many of the newly listed
rms
A third factor that may be
contributing to the increase in
the number of dividend payers
is a little more subtle The
technology-heavy NASDAQ
index plummeted in the spring
of 2000 and it became clear
that many newly listed
companies were likely to fail
 Corporation Smooth Dividends
Dividend cutsbad
newscompanies only cut
when there is no other
acceptable alternative
Companies reluctant to Dividend Growth
increase dividends unless they
are sure the new dividend level lags earnings growth
can be sustained
Dividend-paying companies
tend to raise dividends only
after earning have risen, and Dividend growth will
they dont increase or cut tend to be much
dividends in reponse to smoother than
temporary earning fluctuation earnings growth