R Ltd. has surplus cash of 100 lakhs and wants to distribute 27% of it to the shareholders. The company decides to buy back shares. The Finance…

CA Final · Advanced Financial Management · MTP · September 2025
R Ltd. has surplus cash of 100 lakhs and wants to distribute 27% of it to the shareholders. The company decides to buy back shares. The Finance Manager of the company estimates that its share price after re-purchase is likely to be 10% above the buyback price if the buyback route is taken. The number of shares outstanding at present is 10 lakhs and the current EPS is 3. You are required to suggest: The price at which the shares can be re-purchased, if the market capitalization of the company should be 210 lakhs after buyback,The number of shares that can be re-purchased, andThe impact of share re-purchase on the EPS, assuming that after buyback net income shall remain the same.

Suggested Answer and Working Notes:

(i) Let P be the buyback price decided by R Ltd. Market Capitalisation after Buyback 1.1P (Original Shares – Shares Bought Back) = 1.1P (10 lakhs - (27% of 100 lakhs) / P) = 11 lakhs x P - 27 lakhs x 1.1 = 11 lakhs P - 29.7 lakhs Again, 11 lakhs P – 29.7 lakhs or 11 lakhs P = 210 lakhs + 29.7 lakhs or P = 239.7 / 11 = 21.79 per share (ii) Number of Shares to be Bought Back :- = 27 lakhs / 21.79 = 1.24 lakhs (Approx.) or 123910 share (iii) New Equity Shares:- 10 lakhs - 1.24 lakhs = 8.76 lakhs or 1000000 – 123910 = 876090 shares ... EPS = (3 x 10 lakhs) / 8.76 lakhs = 3.43 Thus, EPS of R Ltd., increases to 3.43.

Topics: Security Valuation

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