Effect of a Share Repurchase on Book Value Per Share

Book value per share (BVPS) refers to a company’s total shareholders’ equity divided by the total number of outstanding shares.

A share repurchase can impact a company’s BVPS. It is important to note what the impact of  BVPS is given that it is used in the computation of the price to book value ratio, which is a popular metric used in equity valuation.

How Share Repurchases Impact BVPS

A company’s book value per share will increase after a share repurchase only if the market price per share was lower than the book value per share prior to the repurchase.

Likewise, a company’s book value per share will decrease after a share repurchase if the market price per share was higher than the book value per share prior to the repurchase.

Calculating the Effect of Share Repurchases on BVPS

An example will help explain this concept clearly.

Assume that the information in the table below is relevant to a company which is about to embark on a share repurchase:

If the company buys back 100,000 shares at the market price, it will spend 100,000 x $10.00 = $1,000,000 on the share repurchase.

After the share repurchase–

The company will then have 1,000,000 – 100,000 = 900,000 outstanding shares.

Shareholders’ equity or book value will become $15,000,000 – $1,000,000 = $14,000,000.

And, book value per share, BVPS will = $14,000,000/900,000 = $15.56.

You can observe that since the market price per share < BVPS prior to the share repurchase; BVPS has increased from $10.00 to $15.56 after the repurchase.

Question

You are given the information in the table below for a company which intends to repurchase 100,000 of its shares. What is its BVPS after the repurchase and does its value increase, decrease or remain unchanged?

Market price per share:	$8.00
No. of shares outstanding	1,000,000
Shareholders’ Equity	$6,000,000.00
Book value per share	$6.00

A. BVPS: $5.78; Change in BVPS: decrease

B. BVPS: $6.34; Change in BVPS: increase

C. BVPS: $6.00; Change in BVPS: unchanged 

Solution:

The correct answer is A.

If the company buys back 100,000 shares at the market price, it will spend 100,000 x $8.00 = $800,000 on the share repurchase.

After the share repurchase–

The company will have 1,000,000 – 100,000 = 900,000 outstanding shares.

Book value = $6,000,000 – $800,000 = $5,200,000.

BVPS = $5,200,000/900,000 = $5.78.

Since $5.78 < $6.00, BVPS has decreased.

Reading 38 LOS 38e:

Calculate the effect of a share repurchase on book value per share