This article will help you to learn about how to calculate shares repurchase price.
In times of surplus cash available with the firm and no investment opportunities are available to profitably deploy the surplus funds, a company may use those funds to repurchase shares from the shareholders.
With repurchase of shares, few shares remaining outstanding which will result in increased earnings per share and increase in the market price of share and reduction in amounts required in the form of dividends.
The share repurchase price can be calculated as follows:
Where,
P = Equilibrium repurchase price
M = Current market price per share prior to distribution
S = Number of shares outstanding prior to distribution
N = Number of shares to be repurchased
Illustration:
Fortune Ltd. has issued and paid up capital of Rs.5,00,00,000, the paid value is Rs.10 each. The present market price of the share is at Rs.74. The company has decided to repurchase 20,00,000 shares. Calculate the repurchase price of the shares.
Solution:
(i) If the purchase price is more than Rs.123.33, the shareholders who are selling the shares would gain at the expense of those who continued to hold the stock.
(ii) If the repurchase price is less than Rs.123.33, the selling stock holders would lose and the continuing shareholders will be benefited.