Share repurchase proposal: Currently, the firm has available capital (cash and net income) of approximately $5,000,000. There is a large block of stock available at $25 a share. The initial outstanding shares for the company are 15,000,000.
If the firm decides to spend this amount of excess cash on a share repurchase program, how many shares of stock will be outstanding after the stock repurchase is completed?
What are the benefits of repurchasing shares? How will this affect the capital structure of the company? How can this be interpreted in the marketplace?
Would a dividend be better? Please discuss the pros and cons of dividends and share buybacks. Make a recommendation to management.
Concept Check: There are tax ramifications which tend to get very complex; for the sake of this exercise let us disregard tax implications and effects.
Helpful Hint: Think about the impact on the ratios that companies usually are measured by in the marketplace. Look at these policies through the eyes of current and potential investors as well as management of ACME.