M18-02-AccountingforStockBuybacks

Model18-02AAccountingforaStockBuyback—UseExcessCashPanelA:InputsExcessCash$2,000millionNetIncome$1,000millionEarningsRateonExcessCash5%SharesOutstanding500millionP/ERatioPre-Buyback30Post-Buyback20TaxRate40%SharesforBuyback50millionSharePriceBuyback$40.00Buyback50millionshares@$40=$2,000millionPanelB:BalanceSheets($millions)BeforeBuybackAfterBuybackCash$4,000$2,000OtherAssets$6,000$6,000TotalAssets$10,000$8,000TotalDebt$4,000$4,000BookShareholders'Equity$6,000$4,000TotalClaims$10,000$8,000PanelC:FinancialEffectsNetIncome$1,000$940EPS$2.00$2.09P/ERatio3020MarketPriceperShare$60.00$41.80BookValueperShare$12.00$8.89MarketCapitalization(millions)$30,000$18,810ReturnonBookEquity16.67%23.50%NetDebt-to-EquityRatio33.33%100%PanelD:CalculationsAfterBuybackNetIncome=Netincomelessaftertax5%(1-T)earningson$2,000excesscash=$1,000-60=$940EPS=Netincome/NewShares=$940/(500-50)=$940/450=$2.09MarketPriceperShare=$2.09times20=$41.80ChangeinPriceperShare=($41.80-$60.00)/$60.00=-$18.20/$60.00=-30.3%BookValueperShare=$4,000/450=$8.89MarketCapitalization=$41.80times450=$18,810ReturnonBookEquity=$940/$4,000=23.50%NetDebt-to-EquityRatio=$4,000/$4,000=100.00%M-37Model18-02BAccountingforaStockBuyback—UseDebtPanelA:InputsNetIncome$1,000millionBefore-TaxCostofDebt8%SharesOutstanding500millionP/ERatioPre-Buyback30Post-Buyback20TaxRate40%SharesforBuyback50millionSharePriceBuyback$60.00Buyback50millionshares@$60=$3,000millionPanelB:BalanceSheets($millions)BeforeBuybackAfterBuybackCash$1,000$1,000OtherAssets$6,000$9,000TotalAssets$7,000$10,000TotalDebt$4,000$7,000BookShareholders'Equity$6,000$3,000TotalClaims$10,000$10,000PanelC:FinancialEffectsNetIncome$1,000$856EPS$2.00$1.90P/ERatio3020MarketPriceperShare$60.00$38.00BookValueperShare$12.00$6.67MarketCapitalization(millions)$30,000$17,100ReturnonBookEquity16.67%28.53%NetDebt-to-EquityRatio66.67%233%PanelD:CalculationsAfterBuybackNetIncome=Netincomelessaftertax8%(1-T)costofdebtonadditional$3,000debt=$1,000-144=$856EPS=Netincome/NewShares=$856/(500-50)=$856/450=$1.90MarketPriceperShare=$1.90times20=$38.00,ChangeinPriceperShare=($38.00-$60.00)/$60.00=-$22.00/$60.00=-36.7%BookValueperShare=$3,000/450=$6.67MarketCapitalization=$38.00times450=$17,100ReturnonBookEquity=$856/$3,000=28.53%NetDebt-to-EquityRatio=$7,000/$3,000=233.33%M-38Model18-02CAccountingforaStockBuyback—UseMixofCashandDebtPanelA:InputsNetIncome$1,000millionEarningsRateonExcessCash5%Before-TaxCostofDebt8%SharesOutstanding500millionP/ERatioPre-Buyback30Post-Buyback20TaxRate40%SharesforBuyback50millionSharePriceBuyback$60.00Buyback50millionshares@$60=$3,000millionFundsforBuyback:ExcessCash$1,500millionDebt$1,500millionPanelB:BalanceSheets($millions)BeforeBuybackAfterBuybackCash$2,500$1,000OtherAssets$7,500$7,500TotalAssets$10,000$8,500TotalDebt$4,000$5,500BookShareholders'Equity$6,000$3,000TotalClaims$10,000$8,500PanelC:FinancialEffectsNetIncome$1,000$883EPS$2.00$1.96P/ERatio3020MarketPriceperShare$60.00$39.20BookValueperShare$12.00$6.67MarketCapitalization(millions)$30,000$17,640ReturnonBookEquity16.67%29.43%NetDebt-to-EquityRatio41.67%183%PanelD:CalculationsAfterBuybackNetIncome=Netincomelessaftertax5%(1-T)earningson$1,500excesscashlessaftertax8%(1-T)costofdebton$1,500additionaldebt=$1,000-45-72=$883EPS=Netincome/NewShares=$883/(500-50)=$883/450=$1.96MarketPriceperShare=$1.96times20=$39.20,ChangeinPriceperShare=($39.20-$60.00)/$60.00=-$20.80/$60.00=-34.7%BookValueperShare=$3,000/450=$6.67MarketCapitalization=$39.20times450=$17,640ReturnonBookEquity=$883/$3,000=29.43%NetDebt-to-EquityRatio=$5,500/$3,000=183.33%M-39