Question

1. XYZ Manufacturers plans to repurchase $10 million worth of common stock with borrowed

funds. The following information is provided:

Repurchase price = $25

Net income after tax = $120 million

EPS before repurchase = $1.5

Given that the company finances the repurchase by borrowing at an after-tax interest rate of

13.5%, what is the EPS after the repurchase?

2. MID Co. has 10 million shares outstanding and each share is currently worth $50. The company

made $35 million in after-tax profits during 2010 and plans to buy back shares worth $11 million

at the end of the year.

Given that the company will be able to repurchase the shares at a 10% premium to the current

market price, what is the company’s EPS after the share repurchase?

3. ASIA Co. has 30 million shares outstanding, trading for $60, with an EPS of $2.50 and a P/E

multiple of 24. The company earns net income of $200 million for the year and pays out an

annual dividend of $1.50 per share. The board of directors is considering a 3-for-2 stock split.

a) What is the company’s stock price after the stock split?

b) What is the company’s dividend yield after the stock split?

Answer 1

Anwer 1,

EPS = Net income after tax/Number of shares

1.5 = 120 million/Number of shares

Number of shares = 120 million/1.5

=80 million

Shares repurchased= Amount of repurchase/repurchase price

10 million/25

=0.4 million

Shares outstanding after repurchase = 80 million - 0.4 million

=79.6 million

Aftertax interest cost on debt = Debt amount * after tax cost

=10 million * 13.5%

=1.35 million

Net profit after tax (after repurchase) = Before repurchase Net profit - Interest cost

=120 million - 1.35 million

=118.65 million

EPS = Net profit after repurchase/shares outstanding after repurchase

=118.65 million / 79.6 million

=1.490577889

So EPS after repurchase is $1.49

(note: separate first question is answered as HOMEWORKLIB RULES policy)