15 Stock Repurchases: Example 15-6 4. The Microsoft Corp. has $10M in cash for i
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15
Stock Repurchases: Example 15-6 4. The Microsoft Corp. has $10M in cash for its next dividend but is considering a repurchase instead. Microsoft has 20M shares outstanding, currently selling at $50 per share. The P/E is 10 on EPS of $5. a. If the dividend is paid how large will it be per share? b. If stock is repurchased how many shares will remain outstanding and what will the new EPS be? c. If the P/E holds at 10, what will be the new stock price and how much per share will continuing stockholders have gained? How does that compare with the dividend that could have been paid? d. Are there other considerations (words only)?Explanation / Answer
a) Dividend available for distribution = 10000000
Number of shares outstanding = 20000000
Dividend per share = Dividend available for distribution / Number of shares outstanding
= 10000000 / 20000000
= 0.50 per share
B) Number of shares outstanding before repurchase = 20000000
Current market price = 50
Amount available for dividend = 10000000
Number of shares repurchased = 10000000/50 i.e 200000
C) Total earnings available for equity shareholders = EPS * Number of shares outstanding
= 5*20000000
=10000000
Number of shares outstanding after repurchase = 10000000
EPS after repurchase = 100000000/10000000
= 10
New stock price = EPS * P/E ratio
= 10*10 i.e 100
If the amount would have been distributed as dividend each shareholder would have get 0.50 but after repurchase the price of the stock will double and in future they will receive more income as compared to current situation
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