The following financial data on the Bond Recording Company areâ available:
The firm is currently considering whether it should use â$400,000 of its earnings to help pay cash dividends of â$1.00 per share or to repurchase stock at â$29 per share.
a. Approximately how many shares of stock can the firm repurchase at the â$29-per-share price, using the funds that would have gone to pay the cashâ dividend?
b.ââCalculate the EPS after the repurchase.
c. If the stock still sells at 14 timesâ earnings, what will the market price be after theâ repurchase?
d. Compare theâ pre- andâ post-repurchase earnings per share.
e.ââCompare and contrast theâ stockholders' positions under the dividend and repurchase alternatives. What are the tax implications under eachâ alternative?
Earnings available for common stockholders $800,000 Number of shares of common stock outstanding 400000 Earnings per share ($800,000/400,000) $2 Market price per share $28 Price/earnings (P/E) ratio ($28/$2) 14
The following financial data on the Bond Recording Company areâ available:
The firm is currently considering whether it should use â$400,000 of its earnings to help pay cash dividends of â$1.00 per share or to repurchase stock at â$29 per share.
a. Approximately how many shares of stock can the firm repurchase at the â$29-per-share price, using the funds that would have gone to pay the cashâ dividend?
b.ââCalculate the EPS after the repurchase.
c. If the stock still sells at 14 timesâ earnings, what will the market price be after theâ repurchase?
d. Compare theâ pre- andâ post-repurchase earnings per share.
e.ââCompare and contrast theâ stockholders' positions under the dividend and repurchase alternatives. What are the tax implications under eachâ alternative?
| Earnings available for common stockholders | $800,000 |
| Number of shares of common stock outstanding | 400000 |
| Earnings per share ($800,000/400,000) | $2 |
| Market price per share | $28 |
| Price/earnings (P/E) ratio ($28/$2) | 14 |
