Question

August Ltd has equity capital amounting to N$350 million comprising ordinary share capital N$70million and retained earnings of N$280 million. The par value of a fully paid up share is N$10. August Ltd has a profit after tax for the year just ended of N$87.5 million. The current market price of the share is N$110 and the dividend ratio is 60%. Debt amounts to N$420 million. (d) Suppose the company decides to buy back shares worth N$41.8 million at the current market price. Explain the effect of this re-purchase on : (i) Equity capital (ii) Market price of the share (iii) Dividend per share

Answer 1

1.Current Capital structure		After buy-back		Change
Fig.in Mlns.
Equity capital	70	Equity capital(70-41.8)	28.2	-41.8
Retained Earnings	280	Retained Earnings	315	35
Total equity	350	Total equity	343.2	-6.8
Debt	420	Debt	420
Total capital	770	Total capital	763.2

2.Dividend/share
	Before buy-back				After buy-back
Share capital	70000000				Total market price of shares bought		41800000
Par value/share	10				Market Price/Share		110
so,No.of shares	7000000				so,No.of shares bought(41800000/110)		380000
						mlns.
Profit after tax for the yr.	87.5				Profit after tax for the yr.	87.5
Less: Dividend pay-out (60%*87.5)	52.50				Less: Dividend pay-out (60%*87.5)	52.50
Retained amt.	35.00				Retained amt.	35.00
No.of shares bought (as above)	7000000				No.of shares o/s.(7000000-380000)	6620000
so, dividend /share(52500000/7000000)	7.50				so, dividend /share(52500000/6620000)=	7.93

3. Market price/share
	Without buy-back				With buy-back
EPS
87500000/7000000=	12.5
8750000/6620000=					13.22
As EPS increases, MPS will also increase in expectation of increased earnings per share.