Stock Repurchase

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6. Stock repurchases Companies with excess cash often employ share repurchase plans in place of or along with cash dividends. Share repurchase plans can help investors liquidate their holdings by selling their stock to the issuing company and earning from capital gains. Consider the case of Gadgetron Inc.: Gadgetron Inc. expects to earn $5,300,000 this year. The company currently has 830,000 shares outstanding, and the shares have a per-share market price of $19. Assuming that Gadgetron's price-to-earnings (P/E) ratio remains constant and its earnings are unaffected by a share repurchase transaction, then the company's expected market price per share-if it repurchases 85,000 shares at the current market price-should be Which of these factors are considered an advantage of a stock repurchase? Check all that apply. The firm might pay too high a price for the repurchased stock. Repurchases can be used to produce large-scale changes in capital structure. When a firm distributes cash by…

Question 5 The Joe Company has experienced a slow (3 percent per year) but steady increase in earnings per share. The firm has consistently paid out an average of 75 percent of each year’s earnings as dividends. The stock market evaluates Joe primarily on the basis of its dividend pay-out because growth prospects are moderate. Joe’s management presents a proposal to the board of directors that would require the investment of RM50 million to build a new plant in the rapidly expanding Ipoh market. The expected annual return on the investment in this plant is estimated to be in excess of 30 percent, more than twice the current company average. To finance this investment, a number of alternatives are being considered. They include the following: a) Finance the expansion with debt. b) Finance the expansion with 50 percent externally generated equity and 50 percent internally generated equity. This alternative would necessitate a dividend cut for this year only. c) Finance the expansion with…

Stock repurchase Harte Textiles, Inc., a maker of custom upholstery fabrics, is concerned about preserving the wealth of its stockholders during a cyclic down- turn in the home furnishings business. The company has maintained a constant dividend payout of $2.00 tied to a target payout ratio of 40%. Management is preparing a share repurchase recommendation to present to the firm❝s board of directors. The following data have been gathered from the last two years: 2014 2015 Earnings available for common stockholders $1,260,000 $1,200,000 Number of shares outstanding 300,000 300,000 Earnings per share $4.20 $4.00 Market price per share $23.50 $20.00 Price/earnings ratio 5.6 5.0 a. How many shares should the company have outstanding in order to combine the earnings available for common stockholders of $1,200,000 in the year 2003 and a dividend of $2.00 to produce the desired payout ratio of 40%? b. How many shares would Harte have to repurchase to have the level of shares outstanding…

Collapse   After learning how to value a stock in his Corporate Finance class, Mark Stark decided to put his knowledge into practice and use the constant growth rate model to value El Tomate Feliz Co. He found that the company was severely undervalued. The stock was trading at $50 per share, but he valued it at $120 per share. Mark complained: “I thought that El Tomate Feliz was a steal and bought as many shares as I could, but the price didn’t go up. I have waited a year, and the price has not changed that much.” What could have gone wrong with Mark’s valuation? What can Mark do to mitigate pitfalls in valuation?

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Stock prices and intrinsic values Benjamin Graham, the father of value investing, once said, “In the short run, the market is a voting machine, but in the long run, the market is a weighing machine.” In this quote, Benjamin Graham was referring to the key difference between the “price” and the “value” of a security.   In November 2006, Citigroup’s stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007–2008 and by the end of October 2009, Citigroup’s stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value.   Based on your understanding of stock prices and intrinsic values, which of the following statements is true? A stock’s intrinsic value is based on the fundamental cash flows and the company’s risk. OR The intrinsic value of a stock is based only on the perceived risk in the company.     You can estimate the value of a company’s stock using models such as the…

Stock prices and intrinsic values Benjamin Graham, the father of value investing, once said, “In the short run, the market is a voting machine, but in the long run, the market is a weighing machine.” In this quote, Benjamin Graham was referring to the key difference between the “price” and the “value” of a security.   In November 2006, Citigroup’s stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007–2008 and by the end of October 2009, Citigroup’s stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value.   Q1. Based on your understanding of stock prices and intrinsic values, which of the following statements is true?   a. A stock’s intrinsic value is based only on the perceived risk of a stock.   b. A stock’s intrinsic value is based on true investor returns.   Q2. You can estimate the value of a company’s stock using models such as the corporate valuation model…

Stock prices and intrinsic values Benjamin Graham, the father of value investing, once said, “In the short run, the market is a voting machine, but in the long run, the market is a weighing machine.” In this quote, Benjamin Graham was referring to the key difference between the “price” and the “value” of a security.   In November 2006, Citigroup’s stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007–2008 and by the end of October 2009, Citigroup’s stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value.   Q1. Based on your understanding of stock prices and intrinsic values, which of the following statements is true?   a. A stock’s market price is often based on investors’ perceived risk in the company.   b. The intrinsic value of a stock is based only on perceived investor returns.   Q2. You can estimate the value of a company’s stock using models such as the…

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Problem 1: Brash Corporation initiated a new corporate strategy that fixes its annual dividend at $2.05 per share forever. If the risk-free rate is 4.1% and the risk premium on Brash's stock is11.1%, what is the value of Brash's stock? Problem 2: Slater Lamp Manufacturing has an outstanding issue of preferred stock with a par value of $40 and an 18% annual dividend. a. What is the annual dollar dividend? If it is paid quarterly, how much will be paid each quarter? If the preferred stock is noncumulative and the board of directors has passed the preferred dividend for the last 1 quarter. how much must be paid to preferred stockholders in the current quarter before dividends are paid to common stockholders? If the preferred stock is cumulative and the board of directors has passed the preferred b. С. dividend for the last 1 auarter how much must be paid tonreferred stockholders in the.

5 "In dividend valuation model of stock price we do not pay attention to capital gain of selling stock." Is this statement true or false? Explain. 6 a) French Company decided to take a $1.5 mln bank loan, as the bank is offering a good interest rate of 9% p.a. Also, French Company has 10 000 shares outstanding. Today the price of the stock is $350. The expected market risk premium is 12% p.a., and the beta of the company's common stock is 0.4, while the risk-free rate is 6% p.a. Calculate the company's after-tax WACC (weighted average cost of capital), assuming the company pays tax at a 35% rate. b) Assume, that in future French Company doubles its debt. How will this decision affect the company's cost of capital? Will this decision lead to a rise in the company's value? Explain.

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Question 7.   The market capitalisation of Tesla fell from about $1tr at the beginning of Jan 2022 to about $330bn at the end of Jan 2023 in spite of car deliveries increasing by 40% year on year. Part of the drop was believed to be associated with the fact that Tesla's founder sold a substantial holding of shares in Tesla to fund his acquisition of Twitter. How consistent is this evidence with markets being efficient? Explain.

Assume that company A wants to boost its stock price. The company currently has 20 million shares outstanding with a market price of $21 per share and no debt. A has had consistently stable earnings, and pays a 35% tax rate. Management plans to borrow $50 million on a permanent basis and they will use the borrowed funds to repurchase outstanding shares. If shareholders are perfectly rational and informed, what will the repurchase price per share be (keep two decimal places and assume that the new borrowing will not have any negative effects)?