Casual_Investor,
I'm glad you have a degree, where is it from?
>Think of this little example. A company exists called >ABC. The company is woth 30 million. There are three >shareholders, each with equal shareholdings (10 million >each). The company decides to undertake in a 10million >buyback. It buys back all the shares from one of the >shareholders. The company is now worth 20 million, and >there are two shareholders each, both with 10 million >worth of shares.
As I previously mentioned what your missing is debt. If we assume 30 mill debt and increase asset equivalently As per the equation before buy back
Assets = liabilities + equity
60 mill = 30 mill + 30 mill
=> 3 shareholder worth 20 mill each
after buy back
50 mill = 20 mill + 20 mill
2 shareholders worth 25 mill each
Buying back shares is a transaction that does not affect net profit. No gain or loss arises from share buy-backs because the company is doing business with its owners. The entries for recording share buy-backs affect balance sheet accounts, not the profit and loss statement. Accounting Standard AASB 1040 also requires disclosure of the number of shares brought back, the price paid, and the amount debited to the various shareholders equity accounts.
What is effectively happening is the company finance is being sourced from debt while ownership is concentrated in fewer owners. It is true that companies without debt can't do this but OZ Minerals has debt in the form of convertible bonds.
Ryan
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