Q. No. 26: Radha-Madhav Ltd is in a flush cash position. It is considering to invest
this amount in a project that yield a very low return of 5% p.a. perpetuity. A
suggestion has been made by the CFO of the company. As per this suggestion, the
company may buy back 10% of its outstanding 1m equity shares @ Rs.40 per share
while the market price is Rs.37/- per share. Suppose the company decides to buyback,
should I offer my shares for buy-back assuming Ke = 10%.
Answer: Market value of the company at present: Rs.3,70,00,000
Market value after buy-back = 3,70,00,000 – 20,00,000/9,00,000=Rs.38.89
The shares may be offered for buy as after buy-back price is less than the buyback
price.
can anybody explain why its 20,00,000 not 40,00,000(1,00,000 @ Rs40)???
what is the hidden point ???
CAclubindia
