I need help understanding and computing the answers to Part C and Part D of the

Question

I need help understanding and computing the answers to Part C and Part D of the question. I have already done Part A and Part B and have provided the answers for that part in hope that will help you in explaining how to do Part C and Part D. Please show your work and explain. Thank you. Part A: Overholser Inc. has forecast net income of $10,000,000 over the next year. Overholser also forecasts a capital budget of $8,000,000 for the year. If the firm maintains its capital budget of 50% equity and 50% debt, how much of a dividend can Overholser pay if it follows a strict residual dividend policy? (6,000,000) Part B: Instead of paying a cash dividend, Overholser is considering a stock repurchase. The firm currently has 1,500,000 shares of common stock outstanding that have a current market price of $80 per share. If Overholser carries out the repurchase, it expects to be able to buy the stock at its current market price. What is Overholser

Explanation / Answer

Hi,

Please find the answer as follows:

Part C:

Number of Shares that can be Repurchased = Total Amount Available/Current Price Per Share = 6000000/80 = 75000 shares

Part D:

Revised EPS after the Stock Purchase = 10000000/(1500000 - 75000) = 7.017 or 7.02

PE Ratio = MPS/EPS

12 = MPS/7.02

MPS = 12*7.02 = $84.24

Therefore, expcted stock price after repurchase would be 84.24

Thanks.

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