Due Today at 11:59 PM CST Attempts: Average: 14 9. Stock repurchases Aa Aa Compa

Question

Due Today at 11:59 PM CST Attempts: Average: 14 9. Stock repurchases Aa Aa Companies with excess cash often employ share repurchase plans in place of or along with cash dividends. Share repurchase plans can help investors liquidate their holdings by selling their stock to the issuing company and earning from capital gains. Consider the case of Sixty-second Avenue Company: Sixty-second Avenue Company has forecasted a net income of $5,100,000 for this year. Its common stock currently trades at $18 per share, and the company currently has 720,000 shares of common stock outstanding. It has sufficient funds available to pay a cash dividend, but many of its investors don't like the additional tax liability to which the dividend income subjects them. As a result, Sixty-second Avenue's management is considering making a share repurchase transaction in which it would buy back 70,000 shares of its outstanding shares in the open market by paying the current market share price. Assume that the repurchase transaction will have no effect on either the company's net income or its price-to-earnings (P/E) ratio. What is Sixty-second Avenue's expected stock price after the stock repurchase transaction? O $21.93 per share O $19.94 per share O $24.93 per share O $17.95 per share Type here to search

Explanation / Answer

PE ratio is unchanged after repurchase

5100000/ 720000= 7.08333 is the EPS

PE is 18/7.0833= 2.541

New EPS= 5100000/650000= 7.846$

Price per share after repurchase = 7.84* 2.541= 19.94$

Repurchase is an advantage as it removes a large block of unwanted shares from the market which then increaSes it's price per share.

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.