PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 16, Problem 20PS
Repurchases and EPS Many companies use stock repurchases to increase earnings per share. For example, suppose that a company is in the following position:
The company now repurchases 200,000 shares at $200 a share. The number of shares declines to 800,000 shares and earnings per share increase to $12.50. Assuming the price–earnings ratio stays at 20, the share price must rise to $250. Discuss.
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6. Stock repurchases
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 Gadgetron Inc.:
Gadgetron Inc. expects to earn $5,300,000 this year. The company currently has 830,000 shares outstanding, and the shares have a per-share
market price of $19. Assuming that Gadgetron's price-to-earnings (P/E) ratio remains constant and its earnings are unaffected by a share repurchase
transaction, then the company's expected market price per share-if it repurchases 85,000 shares at the current market price-should be
Which of these factors are considered an advantage of a stock repurchase? Check all that apply.
The firm might pay too high a price for the repurchased stock.
Repurchases can be used to produce large-scale changes in capital structure.
When a firm distributes cash by…
The Dunn Corporation is planning to pay dividends of $540000. There are 270000 shares outstanding, and earnings per share are $4. The stock should sell for $48 after the ex-dividend date. If, instead of paying a dividend, the firm decides to repurchase stock,a. What should be the repurchase price? b. How many shares should be repurchased? c. What if the repurchase price is set below or above your suggested price in part a? d. If you own 100 shares, would you prefer that the company pay the dividend or repurchase stock? a. 3/10, net 45 b. 3/15 net 30 c. 3/15 net 60 d.2/10 net 45
Suppose a firm issues a dividend of $10.00 per share and plans to issue a constant dividend of $2.00 per share starting from year 1. What is the stock price of the firm's common share? Suppose the discount rate is 9%
(rounded to the 2nd decimal place in a percentage) (eg, 33.33%)
ubmit. Click Save
Chapter 16 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 16 - Dividend payments In 2017, Entergy paid a regular...Ch. 16 - Dividend payments Seashore Salt Co. has surplus...Ch. 16 - Repurchases Look again at Problem 2. Assume...Ch. 16 - Repurchases An article on stock repurchase in the...Ch. 16 - Company dividend policy Here are several facts...Ch. 16 - Prob. 7PSCh. 16 - Information content of dividends What is meant by...Ch. 16 - Information content of dividends Does the good...Ch. 16 - Information content of dividends Generous dividend...Ch. 16 - Prob. 11PS
Ch. 16 - Payout policy in perfect capital markets Go back...Ch. 16 - Payout policy in perfect capital markets Go back...Ch. 16 - Payout policy in perfect capital markets Respond...Ch. 16 - Prob. 15PSCh. 16 - Repurchases and the DCF model Hors dAge...Ch. 16 - Repurchases and the DCF model Surf Turf Hotels is...Ch. 16 - Repurchases and the DCF model House of Haddock has...Ch. 16 - Repurchases and the DCF model Little Oil has 1...Ch. 16 - Repurchases and EPS Many companies use stock...Ch. 16 - Dividends and value We stated in Section 16-3 that...Ch. 16 - Payout and valuation Look back one last time at...Ch. 16 - Dividend clienteles Mr. Milquetoast admires Warren...Ch. 16 - Prob. 24PSCh. 16 - Payout and taxes Which of the following U.S....Ch. 16 - Prob. 26PSCh. 16 - Prob. 27PSCh. 16 - Prob. 28PSCh. 16 - Dividend policy and the dividend discount model...Ch. 16 - Prob. 30PS
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- Please provide solutions. Thank you. 1. A firm has common stock with a prevailing market price of P100 per share. New issue of stock is expected to be sold for P98, with P2 per share representing the under-pricing necessary in the competitive capital market. Flotation costs are expected to total P1 per share. The dividends paid on the outstanding stock over the past five years are as follows: Year Dividend1 P4.002 4.283 4.584 4.905 5.24 The cost of the firm’s new common stock equity is?arrow_forwardSuppose you know a company's stock currently sells for $60 per share and the required return on the stock is 12 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? Multiple Choice O O $3.60 $3.23 $3.40 $6.79arrow_forwardSuppose you know that a company's stock currently sells for $53.47 per share and the required return on the stock is 8.5 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? Answer to two decimals.arrow_forward
- One way to find the value of a share of a stock of a company is to assume the present value of a company is the present value of its projected income stream. The value of each share of stock is equal to the present value of the company divided by the number of shares. For example, if the present value of a company is $10,000 and there are 50 shares of stock, then each share has a present value of $10,000/50-$200. Find the value of each share of a company with 1250 shares if the company is expected to earn $400,00000 per year, I years from now, forever. Assume that the income stream is continuous, and that the continuous interest rate is 5% per year. Round your answer to three decimal places. Value of one share - $ Save for Later Attempts: 0 of 10 used. Submit Answer Q FO M Q Ma Q Ma Qu Ma Viearrow_forwardSuppose you know that a company's stock currently sells for $66.60 per share and the required return on the stock is 11 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield. If It's the company's policy to always maintain a constant growth rate In its dividends, what is the current dividend per share? Note: Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Dividend per sharearrow_forwardSuppose you know that a company's stock currently sells for $65.90 per share and the required return on the stock is 12 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Dividend per sharearrow_forward
- #2: XYZ Corporation is evaluating an extra dividend versus a share repurchase. In either case, $14,500 would be spent. Current earnings are $1.65 per share, and the stock currently sells for $58 per share. There are 2,000 shares outstanding. a) Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth per share. b) What will the company's EPS and P/E ratio be under the two different scenarios?arrow_forwardSuppose you know that a company’s stock currently sells for $54 per share and the required return on the stock is 9 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it’s the company’s policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)arrow_forward(Common stock valuation) Wayne, Inc.'s outstanding common stock is currently selling in the market for $24. Dividends of $3.01 per share were paid last year, return on equity is 21 percent, and its retention rate is 24 percent. a. What is the value of the stock to you, given a required rate of return of 19 percent? b. Should you purchase this stock? Question content area bottom Part 1 a. Given a required rate of return of 19 percent, the value of the stock to you is $enter your response here. (Round to the nearest cent.)arrow_forward
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