Professional Documents
Culture Documents
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Equity repurchase---paying dividends and buying back stocks have same effect on a firm. The cash assets of the firm decline by the amount of the stock buyback or dividends. The process of buyback----if more than 10% are bought back, it has go by tender offer. It has to specify number of shares, period of time and price.
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Sometimes, it keeps the option to withdraw the offer if insufficient offers come. they also use the services of investment bankers. If the number is smaller than 10%, it can go through open market repurchase. Difference between tender offer and open market repurchase------1open market, firm purchases at market rate and in tender offer
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Premium is offered..2in open market purchase firm do not have to disclose publicly their intent to buy back , however regulator rules have to be complied. 3In open market purchase can be spread over much longer period. Other alternative is available to the firm that it can negotiate with the big stockholder for purchase,
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Dividend record has to be maintained but buy back is one time return of cash. uncertainty about future cash flows make buy back a better option. The buy back can be reversed. Buy back offers greater control to the promoters to increase their holding. Buy back helps holding share price.
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Tax benefit if dividend is taxed. Shareholders who want to sell only can exercise the option. In short, equity repurchase allows firms to return cash to stock holders and still maintain flexibility for future periods. Reduces shares, increases EPS and with same PE, price may go up.
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However, the price of the share going up or going down is dependant upon the resultant DER after buy back. The buy back can give a message to the outsiders that future is uncertain and cash flows doubt full.
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Stock split
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No cash is paid out and the split does not alter the proportional ownership of the concern. As dividend , there is ex- date , book closure date. Reason of spilt is that some firms want to keep their price in a range. Widely held range will be beneficial.
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Transaction cost will also be considered. One school of thought will say that spilt shows that firm expects increase in earnings. Some studies have shown that split has unintended effect on stockholders because of transaction cost.
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Some view that it is fooling exercise and firm is in trouble and paying regular cash dividend is not possible. Others view, stock dividends as a supplement to cash dividends and use them in times of high earnings. Stock splits and stock dividends change the number of shares outstanding/
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Divesture
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A firm sells assets or division to the highest bidder. On a sale , firm gets cash which is either rein invested or returned to the shareholders. It can be initiated by both parties and if it has substantial value will engage investment banker.
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If the divesture value is equal to the present value of expected cash flows it will have no effect. If the divesture value is greater than present value of cash flows, it will be beneficial or vice versa. The reason of divesture can be buyer may be more efficient in its utilization--need of cash or rolling back diversification.
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Spinoffs/splitoffs/spiltups
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In a spinoff , a firm carves out a division and creates new shares with claims on this portion of the business. Existing shareholders in the firm receive these shares in proportion to their original holding. They can hold these shares or sell in market.
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Spit up
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Spilt up is expended version of spinoff , the firm splits into business lines , distributes shares in these business lines to the original stockholders in proportion to their ownership in the original firm and then ceases to exist.
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spilt off
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Similar to spinoff, but the existing shareholders are given the option to exchange their parent company stock for these new shares , which changes the proportional ownership in the new company.
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In a equity carve out, a firm separates out assets or a division , creates shares with claim on these assets. And sells them to public. In general, the parent company retains control but in some equity carve outs are follwed by spinoffs.
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Tracking stocks
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Companies create shares in division or subsidiaries that track the performance of just these units. mostly tracking stocks have no voting rights. Liquidation rights as equity holders.
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