Stock repurchaseThe following financial data on the Bond Recording Company are a

Question

Stock repurchaseThe following financial data on the Bond Recording Company are available:

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. The firm is currently considering whether it should use

$400,000 of its earnings to help pay cash dividends of

$1.00 per share or to repurchase stock at $27 per share.

a. Approximately how many shares of stock can the firm repurchase at the $27-per-share price, using the funds that would have gone to pay the cash dividend?

b.Calculate the EPS after the repurchase.

c. If the stock still sells at 13 times earnings, what will the market price be after the repurchase?

d. Compare the pre- and post-repurchase earnings per share.

e.Compare and contrast the stockholders' positions under the dividend and repurchase alternatives. What are the tax implications under each alternative?

Stock repurchaseThe following financial data on the Bond Recording Company are available:

LOADING...

. The firm is currently considering whether it should use

$400,000 of its earnings to help pay cash dividends of $1.00 per share or to repurchase stock at

$27 per share.

a. Approximately how many shares of stock can the firm repurchase at the

$27-per-share price, using the funds that would have gone to pay the cash dividend?

b.Calculate the EPS after the repurchase.

c. If the stock still sells at 13 times earnings, what will the market price be after the repurchase?

d. Compare the pre- and post-repurchase earnings per share.

e.Compare and contrast the stockholders' positions under the dividend and repurchase alternatives. What are the tax implications under each alternative?

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

$26

Price/earnings (P/E) ratio ($26 ÷$2)

   13

Earnings available for common stockholders

$800,000

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Number of shares of common stock outstanding

400 ,000

Earnings per share ($800,000 ÷400,000)

   $2

Market price per share

$26

Price/earnings (P/E) ratio ($26 ÷$2)

   13

Explanation / Answer

(a) how many shares of stock can the firm repurchase at the $27-per-share price, using the funds that would have gone to pay the cash dividend cash Dividend amount = Number of shares * Dividend per share =400,000*$1 =$400,000 Number of shares it can repurchase = Amount available for Repurchase / repurchase Price per share =$400,000/$27 =14814.81 Shares' nearly 14,815 Shares it can repurchase at a price per share $27 (b) EPS after repurchase Number of Shares outstanding after purchase =400,000-14815 =385185 Shares EPS after repourchase = Earnings / Sahres available =$800,000/385185 =$2.077 © if the PE ratio 13 times , what is the price of share After repurchase Price per Share = EPS after repurchase *PE ratio =$2.077*13=$27 (d) Companre pre and Post repurchae earnings per share Earnings per share afer repurchase $2.077 Earnings per share before repurchase $2 Increse in Earnings per share $0.077 By repurchasing of shares at $27 per share , Earnings Per share has been incresed by $0.077 per share

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