Stock Repurchases: Concept Connection Example 15-6 (page 654 14. The Featherston

Question

Stock Repurchases: Concept Connection Example 15-6 (page 654 14. The Featherstone Corp. has $8 million in cash for its next dividend but is considering a repurchase instead. Featherstone has 10 million shares outstanding, currently selling at $40 per share. The P/E is 20 on EPS of $2. 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 olds at 20, 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

Part A)

Dividend per share = total dividend /no. of shares

                                      = 8 million / 10 million

                                      = 0.80 per share

Part B)

No. of shares repurchased = cash to repurchase/ price per share

                                                     = 8 million / 40

                                                     = 200,000 shares

Shares outstanding after repurchase = 10,000,000 -200,000

                                                                         = 9,800,000

Part C)

New EPS = Net Income/ shares outstanding

                = 10 million x 2 / 9,800,000

                = 2.0408

New price = New EPS x P/E ratio

                    = 2.0408 x 20

                    = 40.82 per share

Gain per share = 40.82 -40

                                = 0.82 per share

This benefit is greater than the dividend per share that is 0.80 per share.

Part D)

No, there are no other considerations.

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