buy back of shares is exact opposite of issuing of shares. Q: When does company decide to buyback the shares?

A: when it has surplus capital or lack of investment opportunity. :Company uses its capital and reserves to fund the buy back program. will buy back price be higher than the prevailing market price ?

Example : A company has 5 million shares of face value Rs. 10 each outstanding in the market and it has decided to buy back 75000 shares at Rs. 140 each .
Partial balance sheet of a company before buyback ( in Rs. Million)

Liabilities

Assets

Share Capital 50 ( 5 million shares of Rs. 10 each )

Reserves

200

Generally in which other situations company resorts to share buyback? When company feels that it shares are undervalued in the market . when company feels that it has a high level of equity to service. Is there any Signaling to the market regarding Value of the company ? Post buyback what will happen to EPS? In India, why promoters resort to buy back of shares?

What it is? In a stock split each share is divided into a number of shares of lower face value . Example : Assume that the shares of company XYZ have a face value of Rs.10 and company decides to go for 5 for 1 stock split . What does it mean?

Partial Balance sheet of a company before Stock-Split (in Rs. Million)

Liabilities Share Capital ( 10 million shares of Rs. 10 each ) 100

Reserves

200

Partial Balance sheet of a company After Stock-Split (i s. illi )

Liabilities Share Capital ( 0 illi shares f s. each ) 100

eserves

00

What does NOPAT mean? -A company's potential earnings if its capitalization were unleveraged .

Or in simple language, a companys potential cash earnings if it had no debt.

NOPAT

is an operating performance measure after taking account of taxation but before financing cost (i.e. interest is excluded)

Interest

is totally excluded as the concept of separating finance from operations should be taken into account.

NOPAT = Operating Income x (1 - Tax Rate) i.e. NOPAT = PBIT (1-T) So NOPAT is operating profit minus taxes.

So where do we use NOPAT? NOPAT is a more accurate look at operating efficiency for leveraged companies. It does not include the tax savings many companies get because they have existing debt.

In contrast to EBIT, NOPAT does not take into account the tax savings which a company generates as a result of high debt. So what does it show? -It shows which profit the company would achieve in the event of pure equity financing.

What is Accounting Profit? Why Economic Value Added? EVA concept was developed by Stern Stewart and Co. EVA is a performance measurement tool. Now days which is the widely accepted dominant corporate objective? Creating value for share holders. Many leading companies like general electric , coca cola, siemens, hindustan lever, reliance industries and infosys have accorded value creation a central place in their corporate planning . Greater attention is now being paid to link top management compensation to share holder returns.

Fortune Magazine has called EVA today's hottest financial idea and getting hotter. So what is EVA ? - In its simplest form , EVA measures earnings after the cost of Capital. OR - EVA is excess of operating profit over the cost of capital including the cost of equity.

Let us consider an example : A firm has a total assets of Rs. 55 crore. shareholders equity is Rs. 30 crore. cost of equity is 13%. And firms net earnings are

(Rs. In crore) Sales Less: material cost wages and salaries depreciation power other manufacturing expenses administrative expenses selling and distribution expenses total expenses profit before interest and taxes (PBIT) Less: interest profit before taxes (PBT) less: Taxes profit after taxes (PAT) 103 52 13.5 4.5 7 6.5 3.5 6 93 10 2.5 7.5 2.6 4.9

So what are the earnings available to shareholders? EVA can be calculated in any of the following ways : 1) EVA = PAT Ke * Equity 2) EVA = NOPAT C * Capital Employed

3) EVA = ( r-c) Capital Employed where, Ke = cost of equity c = cost of capital r = return on capital -

What causes EVA to increase? EVA rises when; - The rate of return on existing Capital increases because of improvement in operating performance. This means that operating profit increases without infusion of additional capital in the business. Additional Capital is invested in projects that earn a rate of return greater than the cost of capital. Capital is withdrawn from activities which earn inadequate returns. The cost of Capital is lowered by altering financing strategy.

What is net cash flow? Net cash flow = PAT + Non cash items ( i.e. Depreciation) Q: Can management dispose off net cash flow in any manner they like? A: No because a company has to invest in fixed assets and working capital on a continuous basis to sustain its operations and this is where free cash flow comes into the picture. So what is free cash flow?

It is the cash flow available for distribution to investors ( lenders and shareholders) after the firm has made investments in fixed assets and working capital to support its operations. Why is it called free cash flow? The term "free cash flow" is used because this cash is free to be paid back to the suppliers of capital. Do not confuse it with Cash flow statement. It focuses on the net change cash position. We have , Cash flow from assets = Cash flow to lenders + Cash flow to shareholders. What is cash flow from assets ? Cash flow from assets = Operating cash flow net capital spending addition to net working capital

Operating cash flow = PBIT + Depreciation taxes = 89 +30 -34= 85 Q:Now , what is net capital spending? A: It is simply money spent on buying fixed assets less money spent on selling fixed assets and is defined as: = Ending net fixed assets Beginning net fixed assets + depreciation = 330-322+30 = Rs.38 million.

Addition to net working Capital = beginning net working Capital ending net working capital = 129 -75 = Rs. 54 million So cash flow from assets =Operating cash flow Net Capital Spending addition to net working capital = 85 -38-54 = - Rs. 7 million

Now, Cash flow to lenders : = Interest paid Net new borrowing = 21-56 = -Rs. 35 million Cash flow to shareholders: = dividend paid net new equity raised = 28 -0 = Rs. 28 million Hence cash flow to lenders and shareholders : = -35 + 28 = - Rs. 7 million .

So what does this - Rs . 7 million mean ? Should a negative free cash flow be always considered bad? So generally what kind of firms will have negative free cash flow?