Question

A stock is currently trading for $32. The company has a price–earnings multiple of 10. There are 100 million shares outstanding. Your model indicates that the stock is actually worth $42. The company announces that it will use $350 million to repurchase shares.

1. After the repurchase, what is the value of the stock, according to your model? Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

2. After the repurchase, what is the actual price–earnings multiple of the stock? Do not round intermediate calculations. Round your answer to two decimal places.

3. If the company had used the $350 million to pay a cash dividend instead of doing a repurchase, how would the value of the stock have changed, according to your model? Do not round intermediate calculations. Round your answer to the nearest cent.

   The market value of the stock is now $   .

4. If the company had used the $350 million to pay a cash dividend instead of doing a repurchase, what would be the actual price–earnings multiple after the dividend? Do not round intermediate calculations. Round your answer to two decimal places.

this is all thats given

Answer 1

A. Value of stock after repurchase:

• No. of shares repurchased = Amount utilised / Market price per share = $350 million / $32 = 10,937,500
• No. of shares outstanding after repurchase = 100,000,000 - 10,937,500 = 89,062,500
• Therefore, Value of stock after repurchase = No. of shares outstanding after repurchase x Price per share according to our model = 89,062,500 x $42 = $3,740,625,000

B. PE multiple after repurchase:

Price earnings multiple remains the same at 10. It is thought to be unaffected by share repurchase based on the limited data available.

C. Value of stock if $350 million was for dividend

• No. of shares repurchased = 0
• No. of shares outstanding = 100,000,000
• Therefore, Value of stock as per our model = 100 million x $42 = $4,200,000,000

D. PE multiple if $350 million was for dividend

Price earnings multiple remains the same at 10. It is thought to be unaffected by dividend decision based on the limited data given.

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