Making Flashcards! Help please!! :) Dorchester, Inc. has 7,500 shares of stock o

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Making Flashcards! Help please!! :)

Dorchester, Inc. has 7,500 shares of stock outstanding at a market price of $42 each and earnings per share of $1.80. The firm has decided to repurchase $63,000 worth of stock. What will the PE ratio be after the repurchase, all else held constant?

Select one:

a. $1.30

b. $1.44

c. $2.25

d. $1.80

e. $2.02

Which one of the following statements is correct?

Select one:

a. A portfolio that contains at least 30 diverse individual securities will have a beta of 1.0.

b. An underpriced security will plot above the security market line.

c. A risk-free security plots at the origin on a security market line graph.

d. Any portfolio that is correctly valued will have a beta of 1.0.

e. A portfolio that has a beta of 1.12 will lie to the left of the market portfolio on a security market line graph.

Which one of these statements is correct?

Select one:

a. A fixed stock repurchase plan could be a negative net present value investment for the stock issuer.

b. Since the early 1980's, it has become increasingly more difficult to do a stock repurchase due to SEC regulations.

c. Stock repurchases send the exact same signals to investors as do cash dividends.

d. It is relatively easy to determine whether or not a firm has completed a planned stock repurchase.

e. Fixed stock repurchases allow managers to repurchase shares only when they feel those shares are undervalued.

e. $2.02

Explanation / Answer

Price earnings ratio=Price per share/Earnings per share

Shares repurchased=63,000

Market price per share=$42

Number of shares repurchased=63000/42=1500 shares

Earnings available for equity shareholders before repurchase=7500*1.8=13500

Number of shares outstanding after share repurchase=7500-1500=6000

Earnings per share after repurchase=13500/6000=2.25

P/E ratio after repurchase=42/2.25=18.66

c.

2. b

An underpriced security is one having market value less than the intrinsic value .Such security will plot above the security market line

3.

C

Stock repurchase is also a way of distributing earnings to shareholders and repaying them. When a business has sufficient earnings ,it might want to retire the funds to the owners instead of paying dividend .Stock repurchase reduces the number of shares in the market and the EPS will increase.

Hence ,it sends same signal as to profitability of the business as does a dividend payment.

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