5 ms·
> After the company spends the windfall it's only worth a million afterwards. This is true. But look at a simple example, your example. Company Worth $1,000,00
by rileymat2 4y ago
> After the company spends the windfall it's only worth a million afterwards.
This is true.
But look at a simple example, your example.
Company Worth $1,000,000. 1,000 shares, each worth $1,000.
Windfall Event: They get $1,000,000 of unexpected income.
Now the company was whatever it was before + $1,000,000.
Naturally, that means the company is worth $2,000,000. So the stock price is $2,000.
Well, we buy back half the shares, but it is 500 shares at $2,000 a share. This costs $1,000,000.
Now each share is worth $1,000 because the company has spent half its capital.
- JamesBarney 4y agoSo pre windfall market cap is 1 mil. Say windfall is 1 mil. Post windfall market cap is 2 mil. (1 mil for company + 1 mil in cash) Company buys 500 shares at 2,000. So the company is now worth 1 mil again but there are 500 shares. 1 mil / 500 shares is 2k per share.
- rileymat2 4y agoYes my last sentence was wrong, however as you can see it was 2k a share before the buyback but after the windfall and ended at 2k a share. The buyback did nothing, it was the windfall that moved the price.