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5.2.1 Final_Slides_of_lecture_10

5.2.1 Final_Slides_of_lecture_10 - Advantages of...

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Unformatted text preview: Advantages of Repurchases (1) A “good­news” signal that managers believe firm is undervalued • P0 ⇑ There will be fewer shares with claims on the same future NPAT and future RE • Can sell or choose not to sell • But dividends go to everybody Everybody then has to pay tax Shareholders have choice To the extent not covered by imputation credits Removal of stock “overhanging” the market No long­term target payout ratio to worry about • Target dividend payout ratio makes size of dividend “sticky” • But there is no equivalent for buybacks 1 Advantages of Repurchases (2) Residual dividend model can include: • Dividend per target dividend payout ratio • Plus cash distribution by repurchase for residue Repurchase can be a tool for redesign of capital structure • See worksheet from lecture 4 Repurchased shares can be recycled • To employees with options to exercise • This avoids the dilution problem of a new issue 2 Disadvantages of Share Repurchases Some shareholders may prefer regular dividends • Share repurchases may not be regular or dependable Also there is a dilution problem • The more shares an investor sells back, the smaller the investor’s stake in the firm becomes… …Relative to that of other investors who do not sell shares back Selling shareholders may not be aware of the implications of selling • Firm must advertise and explain carefully in advance To avoid law suits • This hurts remaining shareholders The firm might set too high a repurchase price 3 ...
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