# How many shares of stock can the firm repurchase at

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How many shares of stock can the firm repurchase at the \$21 per share price, using the funds that would have gone to pay the cash dividend? b) Calculate the EPS after the repurchase? c) If the stock sells at 10 times the earnings, what will be the market price after the repurchase? d) Compare the pre and post repurchase EPS Pref. stock \$1,000,000 Common stock (100,000 shares at \$3 par) \$300,000 Paid in capital in excess of par \$1,700,000 Retained earnings \$10,000,000 Total stockholders' equity \$13,000,000 Earnings avail to common stockholders \$800,000 No of shares of common stock \$400,000 E P S \$2 Market price per share \$20 P E Ratio 10
Corporate Finance - 2018 Suresh Herur 15 The shares of A & B both sell for \$100 and offer a pre-tax return of 10%. However, in the case of company A the return is entirely in the form of dividend yield ( the company pays a regular annual dividend of \$ 10 a share). While in the case of B the return comes entirely from Capital gains (the share appreciates by 10% a year). Suppose dividends & capital gains are both taxed at 30%. a) What is the after tax return on share A ? b) What is the after tax return on share B to an investor who sells after two years? c) What about an investor who sells share B after 10 years? 16 “Many companies use stock purchases to increase EPS. For example a company has the following position: The company now repurchases 200,000 shares at \$ 200 a share. The number of shares declines to 800,000 shares & EPS increases to \$12.50. Assuming the P-E ratio remains the same at 20, the share price must rise to \$250.” Discuss

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• Fall '19
• Dividend, Dividend yield, P/E ratio

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