M18-01-IntrinsicValueEffectofRepurchases

Model18-01AIntrinsicValueEffectofRepurchasesvs.Investment(NoSharePricePremium)PartA–BasicRelationships1.Cashflowperyear$3002.Costofcapital10%3.Intrinsicvaluebeforerepurchase=(1)/(2)$3,0004.Numberofshares1005.Intrinsicvaluepershare=(3)/(4)$30.006.Marketvaluediscount33.3%7.Marketpricepershare=(5)x(6)$20.008.Rateofreturnonsharerepurchase=(2)/[(7)/(5)]15.0%9.Sharerepurchase$40010.Dollargainonsharerepurchase=(8)x(9)$60PartB–Repurchasevs.InvestmentResultsCase1Case2RepurchaseInvest$400$4001.Cashflow$300$3602.Costofcapital10%10%3.Intrinsicvalue=(1)/(2)$3,000$3,6004.Investment$400$4005.Newequityvalue=(3)-(4)$2,600$3,2006.Initialnumberofshares1001007.Sharerepurchasepremium0.00%8.Marketpricepershare$20.009.Pricepershareundersharerepurchase=(8)*[1+(7)]$20.0010.Numberofsharesrepurchased=(4)/(9)20.000.0011.Newnumberofshares=(6)-(10)80.00100.0012.Newshareholderintrinsicvaluepershare=(5)/(11)$32.50$32.0013.Marketvaluediscount33.3%14.Newmarketvalue=(5)x[1-(13)]$1,733$2,13315.Newmarketvaluepershare=(14)/(11)$21.67$21.3316.Percentincreaseinmarketprice=[(15)-(8)]/(8)8.33%6.67%10%=15.0%$20.00/$30.00ValueIntrinsicMarkettoofRatioEquityofCostondervaluatiPercentUn1EquityofCostRepurchaseShareonReturnofRateM-36Model18-01BIntrinsicValueEffectofRepurchasesvs.Investment(SharePricePremium)PartA–BasicRelationships1.Cashflowperyear$3002.Costofcapital10%3.Intrinsicvaluebeforerepurchase=(1)/(2)$3,0004.Numberofshares1005.Intrinsicvaluepershare=(3)/(4)$30.006.Marketvaluediscount33.3%7.Marketpricepershare=(5)x(6)$20.008.Rateofreturnonsharerepurchase=(2)/[(7)/(5)]15.0%9.Sharerepurchase$40010.Dollargainonsharerepurchase=(8)x(9)$60PartB–Repurchasevs.InvestmentResultsCase1Case2RepurchaseInvest$400$4001.Cashflow$300$3602.Costofcapital10%10%3.Intrinsicvalue=(1)/(2)$3,000$3,6004.Investment$400$4005.Newequityvalue=(3)-(4)$2,600$3,2006.Initialnumberofshares1001007.Sharerepurchasepremium6.67%8.Marketpricepershare$20.009.Pricepershareundersharerepurchase=(8)*[1+(7)]$21.3310.Numberofsharesrepurchased=(4)/(9)18.750.0011.Newnumberofshares=(6)-(10)81.25100.0012.Newshareholderintrinsicvaluepershare=(5)/(11)$32.00$32.0013.Marketvaluediscount33.3%14.Newmarketvalue=(5)x[1-(13)]$1,733$2,13315.Newmarketvaluepershare=(14)/(11)$21.33$21.3316.Percentincreaseinmarketprice=[(15)-(8)]/(8)6.67%6.67%10%=15.0%$20.00/$30.00ValueIntrinsicMarkettoofRatioEquityofCostondervaluatiPercentUn1EquityofCostRepurchaseShareonReturnofRateValueIntrinsicMarkettoofRatioEquityofCostondervaluatiPercentUn1EquityofCostRepurchaseShareonReturnofRateValueIntrinsicMarkettoofRatioEquityofCostondervaluatiPercentUn1EquityofCostRepurchaseShareonReturnofRateM-36