AutoZone Case Notes

Topics: Stock market, Stock, Share repurchase Pages: 3 (594 words) Published: April 19, 2015
AutoZone Case
Questions
How has AutoZone’s stock price performed over the previous five years? What other financial measures can you cite that are consistent with the stock price performance? How does a stock repurchase work? Why would a company use this tactic? What impact does it have on: EPS? ROIC? How much of AutoZone’s stock price performance should we attribute to the share repurchase program? Assume that AutoZone is planning to stop its share repurchase program. What would be the best alternative use of those cash flows? Why? What should Johnson do about his holdings of AutoZone shares? Dividend Policy

Dividend policy answers the question of whether a company should pay a large percentage of its earnings to shareholders now or pay a smaller percentage (like 0) of its earnings to shareholders Does dividend policy matter?

Assume a company with 100 shares outstanding will get $10,000 per year for 2 years and then will cease to exist. The price of the stock is given by the formula: P0= D1/(1+r) + D2/(1+r) + D3/(1+r)…

Assume r = 10%
Price = (10,000/100)/1.1

Assume the company from the previous example wanted to pay an alternative dividend rate. Instead of paying out the full $10,000 per year, they chose to pay $110 per share in year 1, which is a total payment of $11,000 in the first year $1,000 must be raised in year 1 by issuing $1,000 of more stock New shareholders require a return of 10% in year 2 like the old stockholders $1,000*1.1= $1,100, but I will only receive $10,000 in year 2 so the old stockholders are left with $10,000-$1,100= $8,900 Formula to price stock as follows

P0= 4110/1.1 + $89/1.12 =$173.55
Any increase in dividend at a point in time will be exactly offset by a decrease somewhere else Share Repurchase
Assume there are 100 shares outstanding
Each share is worth $10
Total worth of company’s equity is 100 shares*10= $1,000
Company buys back $100 worth of shares
How much is each share worth?
$100/$10 per share = 10 shares...
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