bvbfan - I agree with everything you said
WangChung ah ahem yes what I ment was Total not net.
so 10 bill of total assets
5 bill of total liabilites
5 bill of owners equity
therefore
10 bill = 5 bill + 5 bill
and book value is $2 per share
after share buy back
total assets are 8 bill
total liabilites are 5 bill (unchanged)
total owners eqity is 3 bill
so book value is $2.6 per share
which is why book value increases. (only with companies that have debt though)
Intrinsic value of a share is the future value of all dividend cash flows discounted at the appropriate discount factor
P=Dt/(k)
P = intrinsic value
Dt= expected dividend
k = appropriate discount factor for the investment
so if Dt = 8 c a year and the discount factor is 0.042
then the intrinsic value is $1.90.
Discount factor =>
interest rate - inflation = 8-3.8 = 4.2%
Discount factor = 1/1+0.042 -1 = 0.042
Both are related to shareprice but none are shareprice. Shareprice is determined by market sentiment and other random things. Shareprice is affected by Book value and intrinsic value but are not directly related.
A buy back increases Book value if there is debt and may increase intrinsic value if Dividends increase.
The market may still decide that share price should go down due to other factors but all things being equal a buy back increases the stock price by limiting supply.
Ryan
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