Chartered Financial Analyst Level 2
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17 An analyst gathers the following information about a company:
- Share price:
$50 - Shares outstanding: 100 million
- Book value of equity:
$6,000 million
If the company completes a $400 million share buyback at the current market price, the book value per share after the transaction will be closest to:
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A
$56
B
$61
C
$65
Explanation:
Calculation Explanation
Given Information:
- Share price:
$50 - Shares outstanding: 100 million
- Book value of equity:
$6,000 million - Buyback amount:
$400million
Step 1: Calculate shares repurchased
- Shares repurchased = Buyback amount / Share price
- Shares repurchased =
$400million /$50= 8 million shares
Step 2: Calculate remaining shares after buyback
- Remaining shares = Initial shares - Shares repurchased
- Remaining shares = 100 million - 8 million = 92 million shares
Step 3: Calculate new book value of equity
- New book value = Initial book value - Buyback amount
- New book value =
$6,000 million -$400million =$5,600 million
Step 4: Calculate new book value per share
- New BVPS = New book value / Remaining shares
- New BVPS =
$5,600 million / 92 million =$60.87
Step 5: Compare to options
$60.87is closest to$61(Option B)
Wait, let me double-check the calculation:
- Initial BVPS =
$6,000 million / 100 million =$60 - After buyback:
$5,600 million / 92 million =$60.87≈$61
Therefore, the book value per share after the transaction will be closest to $61 (Option B).
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