Question

In: Finance

XCo has 400 shares outstanding. It earns $1,000 per year and will use all $1,000 to...

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

Expert Solution

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

jeff jeffy answered 4 months ago

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