Reading 15: Analysis of Div & Share Repachases

University:
California State University, Northridge
Course:
ACCT 220 | Introduction to Financial Accounting
Academic year:

2022
Views:

462

Pages:

19
Author:

SophGr

Page No 12322nd Wed' 23WednesdayDate / /Reading5Aanalysis of Div& Share ReparchasesDividentsCashNon-CashRegularstock divextraStock Splitliquidatingreverse stock splitTypes of DividentsRegular dividentConsistent scheduleegquarterlyCo Try toormaintaindiv/ findShow ConfidentDividendInvestment Plans GDRPs / DRIPS :Allthe portionof cash div is automatically reinvested in additionalIOpen-market DRP - Company purchases share in the Lumopenof share the companymarketto deliver No dilustion2New-issue DRP - Share to deliver are issued newly #share3hybrid - either 1 or2 Page No. 125Date/2UCompany Benefit:-diverseshareholderbasemayencourageamoremay Stimulalongterminvestnew issue DRPsallowthetocaisenewequitycapitalcompanywithout floating costs.Shareholder Benefits:-allow the accumulation of shares using cost avgtypicallynotransactionCostsexclusively)allowsharesat2%--5%new -issueDRPs(butnotmaymarket discDisadvantageextra record Keeping (ACB)still taxableCashDiv & Special div (Non sticky)-Reducecash (asset) & shareholder equity (retained earning's) iatio-Cashliquidity ratio &DIE Ratio levelageEquityStock Div Bonus shareDiv in share / stockRetained earningsNo effect of financial ratio & liquidity RatoEquity shale CapitalStock div isTotal equityremains unchanged100 shora (counted for asEx 30% bonusif30 shalpbyCo.a transfer of130retained earnings toContributed CapitalContributed Captiel Page No 12527th th Feb I 23 MonDate/o Stock Splits - large stock divReverse stock splitsDivision of each shareCombinator of multiple sha'e into oneinto multiple shareShareholder's wealth is unchangedNo. of shareprice of shalesA company whose stock hasValue of Shareholder's total sharesfallen dramatically may dedareis unchangedreverse stock split.0 Liquidating Divwhen whole or part of the firm is soldDiv paidinexcessofcumulativeretainedearnings RE -veNote : In the theory value of a stock reduced by the amtof div on ex-div datePay" of cash div reduces company's assets & MV of its equityDiv Irrelevance TheoryDoes a div pay"ord,thevalueofafirmtoits owners?Ifso whatshouldafirmpayout , policy be ?to ans these que,FCFfirst start byPayoutRetainPayoutmaking the PayoutPolicy.policy irrelevant.NewCashShareDivProjectsReserverepurchases Page No. 126Ke Kot(K.-Kd)PrDate210HMM: Div policy is irelevantassume perfect Capital markets :- No tax + no transaction cost, no ag enlyInfo symmetryHome made DivInvestor wantings more div can sell share (or fractionsInvestor wanting less div Can use div to buy new shareofDivInvestors can create their own divpolicy will have no effect on CoC or sharehold or weaHi.Company div policy adds no valuediv & share repurchase are interchangeableValue of firm dependends only on net income producedby assets + not an how this income is split (Div VS. RE)Divident Preference Theorylost of EquityDiv Pref : Suggests that investor prefer the cortainty of aCash div over the uncertainty of a stock price(Bird - in -hand argument)Results : Higher div lead to higher stock price (lower costs of equCompared to that does notStock risk declines as div increase i.e le WACCDiv are sure thing I RE are risky 'a bird in the hand argumentAgency cost Page No. 127Date / /0 Tax Aversion TheoryInvestor prefer small div pay" to large pay" because :- Capital gains are :1Sometimes taxed at a lower rate Tux on divattractive2Not taxed until realizedResult :- Smaller div result in higher stock price & lowercost of equityif To > Tca,Investor prefer low payout ratio or repurchasesas a form of distributiony To rever Page No. 134March 23 WedDate//21= [C4.5X0.35) -0.7 ] x (1/5)= $ 0.175=New div = 0.7 + 0.175 = 0.875Share Repurchase MethodsOpen Market / bleniblePrevailing market priceFlexibility 7 allows the to to time the repurchase & buywhen the price is attractiveTender offer FastestOffers prem over market price I quick execution, t Shareholders notsolling are at a disadvantage + pro rata acceptance in caseahigher - than - needed no. of share are tenderedSpecific no. of shares are repurchased at a fixed priceDutch Auction CadrSpeed )Is used with tender offerPrem to market pricetodetermine lowest priceSpecifies a range of price ( invites bids & acceptslowest bid first & Continues until target achievedAll sellerreceive the highest accepted bid priceCheaper than fixed price tender but slowerSimilar toacceptable pricestender offer but Co stipulates a range of0 Direct NegotiationPrem to market priceDirect negotiation with a large shareholder to buybachablochofsharefor hostile takeover Threatwith a single large holder : Common in greenmail transaction Page No. 135Date//"*Impact of Repurchase on EPSImpact on EPS depends on whether the repurchase isfianced with excess Cash or new borrowing #shareWhen using excess Cash if the earning ED/P. yield > after -taxopportunity cost of cash, t EPS would increaseWhen using new borrowing if earnings yield > aftercost of debt EPS would increaseEPS = Profit after taxEarying = EPSNo. of share outstandingYieldMPSCost of borrowing = YTM x (1-t)If earning yield > borrowing cost : EPS EPS-if borrowing cost > earning yield :Ex : Impact on EPSZdda Inc has 50,000 share outstanding & has just reported EPSEPS of $2. Zelda's board is evaluating repurchase of 10000 20%of outstanding share at a price of = $30 2/30 per = share share 0Ey 6.67 1.Calculate the % change in EPS after completion of EPSTrepurchase assuming that the total Cost is funded with :aexcess Cash that is not earning any intbdebt with an after tax cost of 3% Page No. 136Date//Soln Cost of acquisition = 10,000 share X $30= $ 300,000Current NI = 50,000 X $2= 100,000 NN ( cash financing )EPS = 100,000=$ 2.50 or 25%40,000with debt NI = $100,000 - 0.03 x 300,000=$91,000EPS 91,000 = $ 2.275 or 13.75 7.40,000BuybachEx2: Share price before buying back = $40 ; , share outstanding beforeEPS before bally back = $3 : Cost of debt=9% = Tax rate y 30%Pannined buyback = 20,000Impact on EPSEarning yield vs After of borrowingt CostEarning Yield = EPS/MPs = 3/40 = 7.5%ATCB > Earning yieldEPSAfter fax Cost of debt = 9x (1-t) = 9x (1-03)= 6.3%ATCB< Earning yiellEPS willafter buyback because erning yield >EPSTEPSBuyBachafter = Net income - After tax cost of funds=(3x120,000) - ( 20,000 X40X 6.3%)Share outstanding after Buyback(120,000 -20,000)= 360,000 - 50,400100,000= $ 3.096E4. After tax cost of bollowistRevised EPS Page No. 137Date//ImpactofRepurchasesonBVPSthepriceforrepurchasepre-purchaseBVPSdeclinethepricepaidforrepurchasepre-purchaseBVPSBUPSwillincreaseBVPSBVofassets-BVofLiabilitiesNo. of Share outstandingBVPSCold)>MPS(new)MPS>BVPS(old):(new)Company ACompany BP.= $20> BVPSPo= $20 BVPSBVPSwhen,PoBVPS Page No.138Date/= 120.00Ex 2:- Share price before buyback = $40 Shares outstanding before BuyberBV = $24 mln Planned buyback = $800,000Current BVPS = 2,400,000 = $ 20120,000New BUPS will decrease + because Current BVPS MPSNo. of share in buyback = $800,000 = 20,000$40New BVPS = Opening BV - Planned buyback2,400,000 - 800,000share outstanding after buyback120,000 - 20,000= $16Share Repurchase Vs. Cash DivIf tax treatment is the same no ( difference in effect onShareholder wealthPwith Div=Pex-div + DivGreenmailMajority buy at premRationalesforsharerepurchase1] Potential tax advantage ;Iftaxrateon- To Vs TeGcapitalgains