August Ltd has equity capital amounting to N350 million comp

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

Solution

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.