CFA Practice Question

CFA Practice Question

One way for a company to increase its book value per share is to ______
A. buy back shares at market prices below their book value
B. increase dividend payout ratio
C. retire long-term debt
Explanation: This will of course decrease the shares outstanding, but the $ value at a lower rate, thus increasing the book value per share.

User Contributed Comments 14

User Comment
andrewsutton Can anyone explain?
bawejate suppose you have 100 shares outstanding at $10 per share.
if you buy back 10 shares..total shares-90 but the equity remains the same so book value per share increases.
It is now being divided by 90 instead of 100
eddeb bawejate explanation is wrong since it does not include the fact that shares must be bought below their book value.

If you rebuy those shares at the same price, BV per share doesn't change.
vikram59 people should not give explanantions unless they are sure!
Kuki vikram/andrew

assume you have 100 shares at $10 each
number of shares = 100
equity = 1000
bvps = 10

now assume you bought 10 shares for $9 each
number of shares = 90
equity = 1000-(10x9)=910
bvps = 910/90 = 10.11

therefore bvps increased BECAUSE you bought back the shares at lower than bookvalue
JHeld Because its your dog..
StanleyMo take you buy back share also need $$, they are inside equity too.
chris12345 stanleymo always has the best answers
rockstarchuckie What's dog? Is it another formula we must learn?
moneyguy yep. we also have to learn "your momma".
praj24 ^ hahaha I'm in tears. It's either your comment or the thought of taking this exam
CalebMast @Kuki, great explanation - the actual book value doesn't change (was $1000 before buyback), but the amount deducted from that book value is less because the shares are priced for less. With a higher book value for the same number of shares, per share value will increase. The fact of deducting buyback from book value makes a lot more sense. I thought it was simply getting more shares for same $ amount, but given same dollar amount, I was at a loss for the explanation (recalling fact that book value reduced by buyback value). Makes sense because all other shareholders benefit in terms of value from the cheaper purchase. Curious to see how firms are able to do that - special relationship with broker, etc.
CalebMast "Able to do that" (me) - meaning, able to buy below market value [as stated in question], and substantial enough to make it worth calculating and accounting for.
skarthi146 I used the process of elimination.
B is wrong: retiring debt has no impact on bv per share (assuming the cash is used to retire the debt)
C is wrong: increasing dividend payout would decrease equity (the numerator of BV), therefore BV per share would decrease.
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