Stock repurchase The following financial data on the Bond Recording Company are
available:
Earnings available for common stockholders $800,000
Number of shares of common stock outstanding 400,000
Earnings per share ($800,000, 400,000) $2
Market price per share $20
Price/earnings (P/E) ratio ($20, $2) 10
The firm is currently considering whether it should use $400,000 of its earnings to
pay cash dividends of $1 per share or to repurchase stock at $21 per share.
a. Approximately how many shares of stock can the firm repurchase at the $21-pershare
price, using the funds that would have gone to pay the cash dividend?
b. Calculate the EPS after the repurchase. Explain your calculations.
c. If the stock still sells at 10 times earnings, what will the market price be after the
repurchase?
d. Compare the pre- and postrepurchase earnings per share.
e. Compare and contrast the stockholdersâ positions under the dividend and repurchase
alternatives. What are the tax implications under each alternative?
Stock repurchase The following financial data on the Bond Recording Company are
available:
Earnings available for common stockholders $800,000
Number of shares of common stock outstanding 400,000
Earnings per share ($800,000, 400,000) $2
Market price per share $20
Price/earnings (P/E) ratio ($20, $2) 10
The firm is currently considering whether it should use $400,000 of its earnings to
pay cash dividends of $1 per share or to repurchase stock at $21 per share.
a. Approximately how many shares of stock can the firm repurchase at the $21-pershare
price, using the funds that would have gone to pay the cash dividend?
b. Calculate the EPS after the repurchase. Explain your calculations.
c. If the stock still sells at 10 times earnings, what will the market price be after the
repurchase?
d. Compare the pre- and postrepurchase earnings per share.
e. Compare and contrast the stockholdersâ positions under the dividend and repurchase
alternatives. What are the tax implications under each alternative?
Related questions
The following financial data on the Bond Recording Company areâ available:
The firm is currently considering whether it should use â$400,000 of its earnings to help pay cash dividends of â$1.00 per share or to repurchase stock at â$29 per share.
a. Approximately how many shares of stock can the firm repurchase at the â$29-per-share price, using the funds that would have gone to pay the cashâ dividend?
b.ââCalculate the EPS after the repurchase.
c. If the stock still sells at 14 timesâ earnings, what will the market price be after theâ repurchase?
d. Compare theâ pre- andâ post-repurchase earnings per share.
e.ââCompare and contrast theâ stockholders' positions under the dividend and repurchase alternatives. What are the tax implications under eachâ alternative?
| Earnings available for common stockholders | $800,000 |
| Number of shares of common stock outstanding | 400000 |
| Earnings per share ($800,000/400,000) | $2 |
| Market price per share | $28 |
| Price/earnings (P/E) ratio ($28/$2) | 14 |
