Stock repurchase Harte Textiles, Inc., a maker of custom upholstery fabrics, is
ID: 2633426 • Letter: S
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 40%. 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: 2014 2015
Earnings available for common stockholders $1,260,000 $1,200,000
Number of shares outstanding 300,000 300,000
Earnings per share $4.20 $4.00
Market price per share $23.50 $20.00
Price/earnings ratio 5.6 5.0
a. How many shares should the company have outstanding in order to combine the earnings available for common stockholders of $1,200,000 in the year 2003 and a dividend of $2.00 to produce the desired payout ratio of 40%?
b. How many shares would Harte have to repurchase to have the level of shares outstanding calculated in part a?
Explanation / Answer
a.) DP Ratio= dividend paid/EPS(Earning per share)
40%=2/EPS
EPS=$5
EPS= Earnings attributable to equity shareholders/ No. of outstanding equity shares
$5= $1200000/No. of outstanding equity shares
No. of outstanding equity shares=$1200000/$5
No. of outstanding equity shares=240000 shares
Therefore,the company should have outstanding 240000 shares in order to have DP Ratio 40%Ans
b. No. of shares to be repurchased=
No. of shares currently outstanding-desired no of equity shares
300000-240000= 60000 sharesAns
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