Case study 3: Victory SAOG is registered with an authorized capital of OMR 50 million ordinary shares of 100 baiza each. The company had issued and paid up capital of OMR 33 million. In the year 2017 Victory SAOG has an outlined share repurchase program which would enable the company to repurchase at least 10 per cent of its outstanding shares. The company had an opening balance of OMR 55 million in its retained earnings account. After completing the required formalities for such repurchase in the vear 2017, the company was able to repurchase the 19.8 million shares valued at OMR 31,680,000 in the month of August. Later in the year 2019 the company was able to repurchase another 10 million shares for OMR 15 million in July. The following are the profits earned by the company over the period of 2017 to 2019: OMR in Millions' 2017: 110 2018: 150 2019: 160 The company decided to distribute dividends as mentioned below: #Interim dividend: 2017: Nil 2018:5% 2019:Nil #Final dividend: 2017:10% 2018:15% 2019:20% Final dividends are proposed in same year but always approved and paid in the succeeding year. You are required to evaluate the overall scenario and answer the following questions: a. Was the company able to achieve its target with its shares repurchase program, justify your answer with suitable calculations? Also briefly discuss as to why does a company voluntarily give millions of Rials back to stockholders in order to repurchase its own stock instead of investing such money in its own business? b. Provide with all necessary calculations the accounting treatment for such repurchase of shares transactions? c. Provide with all necessary calculations and accounting treatment with regards to dividends and retained earnings for the period 2017 2019?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Case study 3: Victory SAOG is registered with an authorized capital of OMR 50 million ordinary shares of 100 baiza each. The company had issued and paid up capital of OMR 33 million. In the year 2017 Victory SAOG has an outlined share repurchase program which would enable the company to repurchase at least 10 per cent of its outstanding shares. The company had an opening balance of OMR 55 million in its
The following are the profits earned by the company over the period of 2017 to 2019: OMR in Millions'
2017: 110
2018: 150
2019: 160
The company decided to distribute dividends as mentioned below:
#Interim dividend:
2017: Nil
2018:5%
2019:Nil
#Final dividend:
2017:10%
2018:15%
2019:20%
Final dividends are proposed in same year but always approved and paid in the succeeding year.
You are required to evaluate the overall scenario and answer the following questions:
a. Was the company able to achieve its target with its shares repurchase program, justify your answer with suitable calculations? Also briefly discuss as to why does a company voluntarily give millions of Rials back to stockholders in order to repurchase its own stock instead of investing such money in its own business?
b. Provide with all necessary calculations the accounting treatment for such repurchase of shares transactions?
c. Provide with all necessary calculations and accounting treatment with regards to dividends and retained earnings for the period 2017 2019?
Step by step
Solved in 3 steps with 5 images
