Question

Assume Watawa Inc., a private corporation with a small number of shareholders, had issued 20,000 common shares at incorporation at a price of $22.00 each. The book value per share was $34.00 at the most recent year end. The company has been paying an annual dividend of $1.56 per share. Recently, the company had offered to repurchase 3,000 shares at $28.00 per share.

You and a friend bought 100 shares each when the shares were issued. Your friend wonders whether she should sell her shares back to Watawa Inc. since the company was offering 27 percent more than she had paid.

Required Analyze the information provided to help your friend decide whether or not she

should sell her shares back to the company.

Answer 1

Issue Size	20,000
Issue Price	22.00
Book Value	34.00
Annual Dividend	1.56
Buyback Price	28.00
Shares offered for repurchase	3,000
% of Shares offered for repurchase	15%	(3,000/20,000*100)
Shares owned by friend	100
Shares eleigible for repurchase	15	(100*15%)

There are multiple factors that she should consider while decidin whether she should sell the same or not:

1. Dividend history and future feasibility: The company has been payin a dividend of $ 1.56 on an investment of $ 22 which approximates to 7.10% per annum, which is a very good return. However, it is important to evaluate that whether the company would be capable enough to pay same level of dividend in coming financial years as well.

2. Valuation of the company: If the book value of the company is $ 32 which is the true pictures of Company's net asset then it is not viable for her to sell the shares of the company.

3. Time Value of Money/oppurtunity cost: If she feels that she has earned sufficently out of the investment that she has made that she can sell the shares. If she fells that she can make more return out of the portion of money received from offering the share for repurchase then she should sell the shares.

Hence deciding as to whether she should sell the share is a subjective topic. However on the basis of my analysis she should not sell the shares as they are giving annual return of 7.10% through dividend and further having net assets of $ 32 per share which is higher then the repurchase price.