Question

9. 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 St. Sebastian Inc.:

St. Sebastian Inc. has forecasted a net income of $5,700,000 for this year. Its common stock currently trades at $19 per share, and the company currently has 830,000 shares of common stock outstanding. It has sufficient funds available to pay a cash dividend, but many of its investors don't like the additional tax liability to which the dividend income subjects them. 

As a result, St. Sebastian's management is considering making a share repurchase transaction in which it would buy back 90,000 shares of its outstanding shares in the open market by paying the current market share price. Assume that the repurchase transaction will have no effect on either the company's net income or its price-to-earnings (P/E) ratio. What is St. Sebastian's expected stock price after the stock repurchase transaction? 

$20.26 per share $27.73 per share $21.33 per share $24.53 per share 

Which of these factors are considered an advantage of a stock repurchase? Check all that apply. 

• Stockholders who sell their stock back to the company might claim that they were not made fully aware of all implications of the repurchase. 

• When a firm distributes cash by repurchasing stock, stockholders have the option to either sell or not sell stock. 

• A repurchase can remove a large block of stock that is overhanging the market and keeping the per-share price depressed.

Answer 1

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