AMN Ltd. has surplus cash of 200 lakhs and wants to distribute 30% of it to the shareholders. The company decides to buy back shares. The Finance…

CA Final · Advanced Financial Management · PYQS · November 2024
AMN Ltd. has surplus cash of 200 lakhs and wants to distribute 30% of it to the shareholders. The company decides to buy back shares. The Finance officer of the company estimates that it share price after repurchase is likely to be 15% above the buyback price if the buyback route is taken. The number of shares outstanding at present is 15 lakhs and the current EPS is 3.00. Bought Back price is to be rounded off to one decimal point. You are required to determine. (i) The price at which the shares can be repurchased, if the market capitalisation of the company should be 250 lakhs after buyback. (ii) The number of shares that can be repurchased. (iii) The impact of share repurchase on the EPS, assuming that net income is the same.

Suggested Answer and Working Notes:

(i) Let P be the buyback price decided by AMN Ltd. Market Capitalisation after Buyback 1.15P (Original Shares – Shares Bought Back) = 1.15P [15 lakhs - (30% of 200 lakhs / P)] = 250 lakhs = 17.25 lakhs x P - 60 lakhs x 1.15 = 17.25 lakhs P - 69 lakhs Again, 17.25 lakhs P – 69 lakhs or 17.25 lakhs P = 250 lakhs + 69 lakhs or P = 319 / 17.25 = 18.5 per share or 18.50 (ii) Number of Shares to be Bought Back :- 60 lakhs / 18.5 = 3.243243 lakhs (Approx.) or 3,24,324 share (iii) Impact on EPS Exiting EPS = 3.00 Number of Shares = 15 lakhs Total Earning = 3.00 x 15 Lakh = 45.00 lakhs Post Buyback number of Shares = 15,00,000 - 3,24,324 = 11,75,676 Revised EPS = 45,00,000 / 11,75,676 = 3.83 or 3.8 Thus, EPS of AMN Ltd. increases to 3.83 or Impact on EPS = 3.83 -3.00 = 0.83 (Increase) or Impact on EPS = 3.8 -3.0 = 0.8 (Increase)

Topics: Security Valuation

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