Aswath Damodaran 335
A Test: The Repurchase Price
! Let us suppose that the CFO of Disney approached you about buying back
stock. He wants to know the maximum price that he should be willing to pay
on the stock buyback. (The current price is $ 26. 91 ) Assuming that firm value
will grow by 4 % a year, estimate the maximum price.
! What would happen to the stock price after the buyback if you were able to
buy stock back at $ 26. 91?
When we divide the increase in firm value by the total number of shares, we are
implicitly assuming that all stockholders (including those who sell back their
shares) will get an equal share of the firm value increase(since the announcement
is public). Thus, we are assuming that the stock will be bought back at 26.91 +
$0.68= $ $ 27.59
If the firm can buy the stock back at the current price of $ 26.91, the remaining
stockholders will get a much greater increase in the stock price. To compute this
change in value per share, we first compute how many shares we would buy
back with the additional debt taken on of $ 6,263 billion (Debt at 30% optimal –
Current Debt) and the stock price of $ 26.91. We then divide the increase in
firm value of $ 1,400 million by the remaining shares outstanding:
Change in stock price = $ 1400 million / (2047.6 – (6263/26.91)) = $ 0.77 per
share
