question archive PLO Bhd is a public listed firm mainly involved in the manufacture of precision tools and molds for the semiconductor, electrical and electronics industries
PLO Bhd is a public listed firm mainly involved in the manufacture of precision tools and molds for the semiconductor, electrical and electronics industries
Subject:AccountingPrice:2.87 Bought7
PLO Bhd is a public listed firm mainly involved in the manufacture of precision tools and molds for the semiconductor, electrical and electronics industries. The firm has a market capitalization of RM1 billion and 40 million shares outstanding. Following the appointment of a new CEO recently, the company plans to distribute a sum of RM125 million through an open market repurchase (assume perfect capital markets). Required:
i) Calculate the price per share of PLO Bhd prior to the repurchase.
ii) Calculate the number of outstanding shares that will be repurchased under this corporate exercise.
iii) Calculate and comment the price per share of the firm prior to and after the share repurchase transaction.
iv) Based on the information provided in Question explain how the share repurchase conducted may transmit information about PLO Bhd to investors?
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Answer:
i) Price per share prior to Repurchase
= market capitalisation / No of shares outstanding
= RM 1 billion / 40 million shares
=RM 25 per share
ii) No of shares repurchased = RM 125 million / RM 25 per share = 5 million shares
iii) No of shares outstanding after repurchase = 40 million - 5 million = 35 million
Value of firm after repurchase = RM 1 billion - RM 125 million = RM 875 million
So, value of share after repurchase = RM 875 million / 35 million shares = RM 25 per share
So, under perfect capital markets, share price will not change as there is no value addition here
iv) Share repurchase can send signal to the investors that the company has good belief on its performance and hence is purchasing its shares and thereby investing in itself (Information signalling)
