Finance Weekly News Update February 18, 2017 – February 24, 2017

Rakuten Surges on Share Buyback at Half the Price of 2015 Issue

Primary Topic – Payout policy
Nakamura, Yuji
Bloomberg.com

 

Key words and Definitions

Payout policy – the firm’s typical method of distributing cash to shareholders.

Share repurchase – the process of a firm buying its own shares back from investors.

Dividends – a cash distribution made by the firm to shareholders.

Summary: Key Points in the Article

Shares of Japanese e-commerce firm Rakuten Inc. moved eleven percent higher after the firm announced its intent to buy back stock worth about 100 billion yen. The current price represents a significant discount on shares that were issued only 20 months ago.

The buyback consists of just over eight percent of the firm’s outstanding stock. The justification given for the move was the belief that its shares were undervalued, having fallen by 46 percent since issuance. Chairman Hiroshi Mikitani indicated the cash-rich firm would spend a fraction of its 548-billion-yen stockpile to make the purchase.

Thinking Critically Questions

  1. How is share repurchase similar to a dividend distribution?
  2. What are the advantages of share repurchase as a form of cash distribution?
  3. What factors contributed to the surge in Rakuten’s stock price?

Multiple Choice Questions

  1. When the firm purchases shares of its own stock in the same manner that investors use to buy shares it is called a(n):
    a. open market repurchase
    b. Dutch auction repurchase
    c. fixed-price tender offer
    d. none of these
  2. When an investor sells shares of stock held longer than one year back to the firm the investor is taxed at the:
    a. capital gains rate
    b. ordinary income rate
    c. investment rate
    d. none of these
  3. Since Rakuten’s stock price surged on the repurchase announcement we can assume:
    a. investors believed it was a positive signal
    b. the Japanese stock market is inefficient
    c. the stock was being purchased by naïve investors
    d. none of these