Aswath Damodaran 336
Buybacks and Stock Prices
! Assume that Disney does make a tender offer for it’s shares but pays $ 28 per
share. What will happen to the value per share for the shareholders who do
not sell back?
a. The share price will drop below the pre-announcement price of $ 26. 91
b. The share price will be between $ 26. 91 and the estimated value (above) or $ 27. 59
c. The share price will be higher than $ 27. 59
If Disney buys shares back at $28, there will be a transfer of wealth from the
stockholders who don’t sell back to those that do. To compute the stock price
after the buyback:
Number of shares bought back = Additional dollar debt/ $ 28 = 6263/28 =
223.68 million shares
Dollar Premium paid to stockholders = 223.68 * (28-26.91) = $243 million
Premium for remaining stockholders = 1400 - 243 = 1 167 million
Increase in stock price for remaining stockholders = 1167/(2047.6 - 223.68) =
$0.64
Stock price after buyback = $26.91 + 0.64 = $27.55
