Despite the downside, there are some significant advantages associated with the repurchase program. Although the company is expected to earn the risk free rate on its surplus cash by investing in treasury securities, the investors demand a much higher rate on their investments. Therefore, if the company does not have any attractive opportunities in the near future, it might be a good strategy to return the cash to shareholders in the form of share repurchase. Additionally, the share repurchase is also an excellent way to reduce the dividend payout ratio without reducing the dividend per share. There is a strong negative sentiment associated with a decrease in dividend per share, and is usually seen by investors as a sign of weakening performance
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How would such a buyback affect Blaine? Consider the impact on, among other things, BKI’s EPS, ROE, its interest coverage and debt ratios, the family’s ownership interest, and the company’s cost of capital.
A repurchase of 14 million shares would reduce the outstanding shares to 45.052 million. However, the company’s net income is also expected to decrease as it will forego interest received from cash investment, and will have to pay additional interest on its debt. Therefore, it is not clear if the BK’s per share earnings will increase because of the leveraged recapitalization. The net income is calculated by first restating the revised earnings before interest and taxes (EBIT) for the loss of interest on cash investments. Then, the EBIT is adjusted for the interest on debt and taxes to calculate the net income. The resulting net income is significantly less than the net income, before the share repurchase decision. However, the earnings per share have increased from $0.91 per share to $0.98. Therefore, the repurchase program has allowed the company to earn more income on each dollar of its outstanding equity
How would such a buyback affect Blaine? Consider the impact on, among other things, BKI’s EPS, ROE, its interest coverage and debt ratios, the family’s ownership interest, and the company’s cost of capital.
A repurchase of 14 million shares would reduce the outstanding shares to 45.052 million. However, the company’s net income is also expected to decrease as it will forego interest received from cash investment, and will have to pay additional interest on its debt. Therefore, it is not clear if the BK’s per share earnings will increase because of the leveraged recapitalization. The net income is calculated by first restating the revised earnings before interest and taxes (EBIT) for the loss of interest on cash investments. Then, the EBIT is adjusted for the interest on debt and taxes to calculate the net income. The resulting net income is significantly less than the net income, before the share repurchase decision. However, the earnings per share have increased from $0.91 per share to $0.98. Therefore, the repurchase program has allowed the company to earn more income on each dollar of its outstanding equity