Question

Company ABC has been paying regular dividend per share of $4 for over 10 years

It is paying all profits out as dividends and is not expected to grow

It has 100,000 share outstanding and the share price is $80

Now the company instead changes to use its profit to repurchase shares

1. What is the investor’s annual return in the current situation

2. Calculate would be the number of shares that it would repurchase and the expected share price for year 1, year 2 and year 3.

Answer 1

1. Annual return in current situation = current earnings/current Price * 100 = $4/$80 *100 = 5%

2. Company's Earnings = Dividend amount * No. of shares = $4 * 100,000 = $4,00,000.

Year 1

Repurchase at Price $80

Number of shares Repurchased = 400000/80 = 5000 shares.

Number of shares at the end of year 1 = 100000-5000 = 95,000

Share price at the end of year 1 = = 84.2105

Year 2

Repurchase at $84.2105

Number of shares Repurchased = 400000/84.2105= 4750 shares

Number of shares at the end of year 2 = 95000-4750 = 90,250

Share price at the end of year 2 =

Year 3

Repurchase at $88.6427

Number of shares Repurchased = 400000/88.6427 = 4512 Shares

Number of shares at the end of year 3 = 90250-4512 = 85,738

Share price at the end of year 3 =