In: Finance
XCo has 400 shares outstanding. It earns $1,000 per year and will use all $1,000 to repurchase its shares in the open market rather than pay dividends, required return = 10%. how many shares will be outstanding at the end of year 1, after the first share repurchase.
A) 393.9
B) 383.8
C) 373.7
D) 363.6
E) 353.5
Correct option is "D"- 363.6 shares
Working:
Today ,earning per share = 1000/400 =$ 2.5 per share
Price Today =Earning per share /rs
= 2.50 /.10
= $ 25 per share
Price at end of year 1 =Price today (1+r)
= 25(1+.1)
= 25*1.1
= $ 27.50 per share
Number of shares repurchased from available funds = 1000/27.50
= 36.4 shares
Shares after repurchased at end of year 1 = 400 -36.4 = 363.6 shares