Finance · level 2
Repurchase vs dividend
A dividend lowers the price per share; a repurchase lowers the share count. In perfect markets shareholders are indifferent — real differences come from taxes, signalling and agency costs of retained cash.
Worked example: 198M shares trade at $88. The firm spends $600M of excess cash on an open-market repurchase. How many shares remain?
Step by step
- 1
Shares bought
$600M / $88 = 6.8M
- 2
Remaining
198M − 6.8M = 191.2M
- 3
Price unchanged
In a perfect market the share price does not move: cash out equals equity value out. A dividend of the same cash would drop the price by the dividend per share instead.
198M shares trade at $88. The firm spends $600M of excess cash on an open-market repurchase. How many shares remain? = 191,181,818
The theory behind it
Intuition
Finance is time and risk applied to cash: move every cash flow to the same date at a rate that reflects its risk, then compare.
Common pitfalls
- ×Discounting a nominal flow at a real rate (or vice versa).
- ×Mixing enterprise-value and equity-value numbers in the same ratio.
In the interview
Valuation, WACC, LBO and accretion rounds — where a wrong bridge is a wrong answer.