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QUESTION 2 The following financial data on the Bond Axiata Berhad are available: Earnings available for...

QUESTION 2

The following financial data on the Bond Axiata Berhad are available: Earnings available for common stockholders RM1,600,000 Number of shares of common stock outstanding 800,000 Market Price per share RM40.00 The firm is currently considering whether it should use RM800,000 of its earnings to pay cash dividends of RM1 per share or to repurchase stock at RM42 per share.

(a) Estimate the Earnings per share before repurchase (EPS)

(b) Find the Price/earnings (P/E) ratio

(c) Determine how many shares of stock can the firm repurchase at the RM42-per share price, using the funds that would have gone to pay the cash dividend.

(d) Calculate the EPS after the repurchase. Explain your calculations.

(e) If the stock still sells at 10 times earnings, what will the market price be after the Repurchase.

(f) Examine the pre and post-repurchase earnings per share for the Bond Axiata Berhad

(g) Compare and contrast the stockholders’ positions under the dividend and repurchase alternatives. Discuss the tax implications under each alternative.

Solutions

Expert Solution

Earning available for common stockholders = RM 1,600,000

Number of shares =  800,000

Market Price per share = RM 40.00

The firm is currently considering whether it should use RM800,000 of its earnings to pay cash dividends of RM1 per share or to repurchase stock at RM42 per share.

(a) Earnings per share before repurchase (EPS) = Earning available / No of shares = RM 1,600,000 / 800,000 = 2

(b) Price/earnings (P/E) ratio = MPS / EPS = 40 /2 = 20

(c) how many shares of stock can the firm repurchase at the RM42-per share price, using the funds that would have gone to pay the cash dividend = Earning to be used / MPS = RM800,000 / 42 = 19,047.62 Share

(d) EPS after the repurchase. = (RM 1,600,000 - RM 800,000) / (800,000 - 19,047.62) = 1.02

RM 800,000 used to repurchase 19,047.62 shares, Earnings available will reduce by RM 800,000 and No of share will also reduce by 19,047.62

(e) PE Ratio = 10 , EPS = 1.02 , MPS after repurchase =?

PE = MPS / EPS

10 = MPS / 1.02

MPS = 10.2

(f)  pre and post-repurchase earnings per share

Pre = 2 and Post = 1.02

Post EPS has reduced substantially since earnings have reduced substantially

( We can solve max 4 parts. If Any query please comment, I will reply in the comments)

jeff jeffy answered 2 years ago
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