Share Repurchases and Stock Valuation Models

Share Repurchases and Stock Valuation Models

Question One

  1. Current Value Per Share

Current value = D / (r – g)

=D = $3, r – 12%, g -6%

= 3/ (12% – 6%)

= $50

Dividend yield = D / p

= D = $3, P – $50

= (3/50) * 100%

= 6%

  1. Expected stock price

= g * p

= 1.12 * 50

= $56

Growth rate in price per share = 56 – 50

= $6

Question Two

  1. Current price per share (Stowe, McLeavey & Pinto, 2007).

= [1.2 + 1.8 / (1 + 0.12) ^1] + 1.8/0.06

= 2.68 + 30

= $ 32.68

Dividend yield

= 1.2 / 32.68

= 3.67%

Repurchase yield

= 1.8 / 32.68

= 5.51%

  1. fraction of the one million outstanding shares will be repurchased the first year

 

= 1.2/ 3(1 + 0.12 – 1.8)

= 0.58

  1. Growth rate in dividend per share

= (1+ g) (1-f) – 1

= (1 + 0.06) (1 – 0.58) – 1

= 5.548%

  1. Expected stock price in one year)

 

= 0.58 * (1.06*1.8) + 1.8 / (1+1.12) ^-1

= $58.81

The growth rate in price per share

= 58.81-56 / 56

= 5.018%

Question Three

Dividends and share repurchases have increased over the years since the article was written. Figure 2.0 below shows the historical dividend and repurchases for S & P companies from 1999 to 2017

Figure 2.0 (Yardeni, Abbott & Quintana, 2016).

Question Four

Stock repurchases happen when an entity requests the shareholders to tender their stocks for repurchase by the entity. It is carried to increase the shareholders’ value. Stock repurchase may be used by the company to restructure the capital structure of the company without raising the level of leverage. On addition to this, instead of the entity changing its dividend policy, it can be able to offer value to the shareholders through the stock repurchases given that the capital gain taxes are usually lower compared to the dividend taxes. Some of the main advantages of stock repurchase it helps to raise the value of the stock (mainly companies buy stocks when they are perceived to be undervalued) and compared to the cash dividend stock repurchases give investors the decision (either to sell or to retain the share). On addition, stock repurchases help to prevent a situation where the potential stockholders fear that a large stockholder may sell all the shares and bring down the value of their stock.

However, despite the advantages, share repurchases has some demerits compared to the dividend. First, cash dividend is dependable from the investors’ perspective but the stock repurchase is not. Dividend is mainly paid on a regular basis compared to stock repurchase, which can be more appealing to investors compared to the stock dividend. Secondly, stock repurchases can make a company pay too much, where an event happens after the repurchase which lowers the value of the stock……………………

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