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In option B...

  1. does the company sell the shares at $100 or at $106? Wouldn't it be selling 56600 shares at $106 rather than 60000 shares at $100? That would leave 943400 shares valued at $106. In your calculation the share buyback results in a +$0.38 bump to the share price, which seems inconsistent.

  2. aren't the assumptions about performance in the next year supposed to be factored in the share price already? [constant earnings per share is indeed a necessary assumption]

In any case, it seems share buybacks are "better" than dividends because the shareholders do not have to implicitly pay any tax on the company's profit: they get $6M as opposed to $4M.

If corporations pay tax only on profit, does this mean that they can use share buybacks to pay no tax at all?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Sat Dec 23rd, 2006 at 06:06:14 AM EST
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