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 shares outstanding.

A share repurchase can impact a company’s BVPS. It is important to note what the impact is given that the BVPS I 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 less 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 greater than the book value per share prior to the repurchase.

Calculating the Effect of Share Repurchases on BVPS

An example will explain this concept best.

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

Market price per share: $10.00
No. of shares outstanding 1,000,000
Shareholders’ Equity $15,000,000.00
Book value per share $15.00

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 shares outstanding.

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; after the repurchase, BVPS has increased from $10.00 to $15.56.

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 it increase, decrease or remain unchanged from its original value?

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 shares outstanding.

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

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