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CS Professional · Corporate Restructuring, Valuation and Insolvency · Types of Corporate Restructuring

Orchid Engineering Ltd has 20,00,000 equity shares outstanding, each with a market price of Rs 150, and the shares trade at that price. It buys back 2,00,000 shares at Rs 150 each out of surplus cash, with no other change. Ignoring taxes and signalling effects, what is the market capitalisation immediately after the buyback, assuming the market value of the firm's other net assets is unchanged and the cash paid reduces firm value one for one?

Market capitalisation after the buyback is Rs 27 crore. Before it was 20,00,000 times Rs 150, or Rs 30 crore. The firm pays out Rs 3 crore in cash, so equity value falls by that amount, leaving 18,00,000 shares at an unchanged Rs 150.

  1. ARs 27,00,00,000Correct
  2. BRs 30,00,00,000
  3. CRs 3,00,00,000
  4. DRs 33,00,00,000

Explanation

Before the buyback, market capitalisation is 20,00,000 x 150 = Rs 30,00,00,000. Cash paid out is 2,00,000 x 150 = Rs 3,00,00,000, which leaves the firm. Equity value falls to Rs 27,00,00,000, which is 18,00,000 shares at Rs 150. The price per share stays at Rs 150. Rs 30 crore ignores the cash outflow.

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