Stock repurchase: Harte Textiles, Inc., a maker of custom upholstery fabrics, is

Question

Stock repurchase: Harte Textiles, Inc., a maker of custom upholstery fabrics, is concerned about preserving the wealth of its stockholders during a cyclic down- turn in the home furnishings business. The company has maintained a constant dividend payout of $2.00 tied to a target payout ratio of 30%. Management is preparing a share repurchase recommendation to present to the firms board of directors. The following data have been gathered from the last two years:

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a. How many shares should the company have outstanding in 2015 if its earnings available for common stockholders in that year are $1,600,000 and it pays a dividend of $2.00, given that its desired payout ratio is 30%?

b. How many shares would Harte have to repurchase to have the level of shares outstanding calculated in part a?

2014 2015 Earnings available for common stockholders $1,680,000 $1,600,000 Number of shares outstanding 300,000 300,000 Earnings per share $5.60 $5.33 Market price per share $31.36 $26.65 Price/earnings ratio 5.6

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Explanation / Answer

a)number of shares outstanding :

Dividend paid = 1600000*30% = 480000

Number of shares outstanding= 480000/ 2 = 240000shares

b)number of shares to repucahse = 300000 -240000 = 60000 shares

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