Question

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 Sixty-second Avenue Company: Sixty-second Avenue Manufacturing Company expects to earn $4,800,000 this year. The company currently has 720,000 shares outstanding, and the shares have a per-share market price of $21. Assuming that Sixty-second Avenue'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 80,000 shares at the current market price-should be Which of these factors are considered an advantage of a stock repurchase? Check all that apply. O A repurchase can remove a large block of stock that is overhanging the market and keeping the per-share price depressed. The price of the firm's stock might benefit more from cash dividends than from a repurchase. When a firm distributes cash by repurchasing stock, stockholders have the option to either sell or not sell stock.

Answer 1

Current EPS = Net Income/Number of shares

= 4,800,000/720,000

= $6.666667 per share

P/E Ratio = Market price per Share/Earnings per Share

= 21/6.66667

= 3.15 times

Revised EPS = 4,800,000/640,000

= $7.5

Market Price = 7.5*3.15

= $23.625

A repurchase can remove a large block of stock

Shareholders have option

The second one is a disadvantage