ADDITIONAL QUESTION 2 On 12 February 2015-the large materials company Rio Tinto

Question

ADDITIONAL QUESTION 2 On 12 February 2015-the large materials company Rio Tinto Ltd announced its intention to undertake a significant off-market share buyback via a series of media releases to the market - as documented in the company announcements section of the ASX website [the ASX ticker code for Rio Tinto is “RIO") You will need to review the following two specific company announcements by RI0 in order to complete the tasks associated with this question: 1. "Rio Tinto Limited off-market buy-back tender" dated 25 February 2015

Explanation / Answer

a) Rio had initially intended to buyback shares worth A$500 million.

b) The Group has allowed the purchase of shares at a discount of eight to fourteen per cent to prevailing market prices as the management believes that the stock is undervalued. Commodity prices were depressed in 2015 and the stock being relatively undervalued, the management believed it to be a good time to buyback shares aiming at a positive commodity market outlook in the future.

c) The earnings per share of the company would increase with its buyback programme as the no.of outstanding shares decreases. Moreover, there will not be any impact on the company's leverage since RIO plans to fund the programme through its cash resources.

d) The capital component buyback price is A$9.44. The difference between the buyback price and the capital component will be treated as a dividend component. Also, for the purpose of Australian capital tax calculations, the capital proceeds which the investrs would get would be the capital component buyback price of A$9.44 plus an amount equal to the excess of the Tax Valueover the Buy-Back Price.

e) The shareholders can either select the Final price of the tender or provide a Minimum share price which involves four minimum prices that shareholders will be able to select from, if they want their tender to be conditional on a minimum price.

f) RIO has finally completed a buyback of A$560 million. The buyback price was A$48.44 per share which was at a discount of 14% to the company's market price. Sine the on-,market buy back of shares had continued and the total total buyback had increased from A$500 to A4560 , all the shareholders were able to sell as many shares as they wanted.

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