P14-17-Stock repurchase The following financial data on the Bond Company are ava

Question

P14-17-Stock repurchase The following financial data on the Bond Company are available;

Earning available for common stockholders              $800,000

Number of shares of common stock outstanding          400,000

Earning per share ($800,00*400,00)                                     $2

Market price per share                                                      $20

Price/earnings (P/E) ratio ($20*$2)                                      10

The firm is currently considering whether it should use $400,000 of its earnings to pay cash dividends of $1 per share or to repurchase at $21-per share.

A) Approximately how many shares of stock can the firm repurchase at the $21-per-share price, using the funds that would have gone to pay the cash dividend?

B) Calculate the EPS after the purchase. Explain your calculations.

C) If the stock still sales at 10 times earnings, what will the market price be after the repurchase?

Explanation / Answer

No. of Share=400000

Available earning for repurchase/Dividend=$400000

A- IF used 400000/- to repurchase at 21 per share

No. of Share can be repurchased=$400000/$21

=19047.62 Share=19048 share(Approx)

B- Remaining Shares=400000-19048=380952 Share

If earning remain same=$800000

EPS=$800000/380952

=$2.10

C- Market price=EPS*PE

2.10*10= $21 PER Share

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