Question

P12.35 Integrative Case Analysis. CSK Auto Corp. is the largest retailer of automotive parts and accessories in the Western United States and one of the largest retailers of such products in the United States based on the number of stores. As of February 4, 2001, the company operated 1,152 stores as one fully integrated company under three brand names: Checker Auto Parts, Schuck's Auto Supply, and Kragen Auto Parts. Presented below is selected information from CSK Auto Corp.'s 2001 10-K report. Assume an effective tax rate of 40 percent. Required 1. On March 17, 1998, the Company completed an initial public offering (IPO). What was the average price (net of underwriting fees) that CSK sold its shares for? 2. In 1999, CSK Auto spent $260.221 million on investing activities. How did the company finance this investment? 3. On February 4, 2001, the company's share price was 56.10 per share. The Board of Directors believes that the company's share price is too low and has recommended a share buyback program. What would be the financial effect of a share buyback, and what accounts would be affected if the company repurchased ten percent of its outstanding shares?

Answer 1

1) Average share price at which CSK sold its shares during IPO Proceeds received under IP0 $172.482 million Underwriting fees & other IPO costs $13.859 million Net proceeds 172.482 13.859 $158.623 million The above computed net proceeds will be divided by the number of shares offered under the IPO to calculate the average price (net of underwriting fees). In the given case, there is no information regarding the number of shares offered under the IPO, that's why average share price has not been computed. 2) The amount of $260.221 million spent by CSK Auto has been financed through borrowings under Senior Credit facility, which can be seen under the cash flow from financing activities.. 3) The financial effect of a share buyback is that it will lead to a reduction in the outstanding shares of the company along with the reduction in the balance of cash available with the company before effecting such buyback. The most significant impact of such buyback is on the share price which tends to increase after a buyback. Consequently, the profitability and the earnings per share are affected in a positive way, thus leading to improved return on Sets and returr on equity. The accounts affected will be cash, retained earnings and share capital.