Question

National Tire LTD. reported the following in its financial statements for the quarter ended March 31, 2014.

	December 31, 2013			March 31, 2014
Common shares (no par value; 55,000 shares outstanding)	$	55,000		$	55,000
Contributed surplus		32,500			32,500
Retained earnings		22,500			22,500
Total shareholders' equity	$	110,000		$	110,000

During the quarter ended March 31, 2014, National reported Net Income of $8,250 and declared and paid cash dividends totalling $8,250.

Required:
1. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended March 31, 2014. (Round your Earnings per share answer to 2 decimal place.)

Earnings per share
Return on equity		%

2. Assume that National repurchases 10,000 of its common shares at a price of $2.25 per share on April 1, 2014. Also assume that during the quarter ended June 30, 2014, National reported Net Income of $8,250 and declared and paid cash dividends totalling $8,250. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended June 30, 2014

Earnings per share
Return on Equity		%

. (Round "Earnings per share" to 3 decimal places and "Return on equity" to 2 decimal place.)

3. Based on your calculations in requirements 1 and 2, what can you conclude about the impact of a share repurchase on EPS and ROE? \

By repurchasing shares, a company can ________ both its EPS and ROE

Answer 1

Answer.1

Average Number of shares outstanding as on March 31, 2014 = 55,000 { (55,000 + 55,000 ) / 2 }

Net income during the quarter ended March 31, 2014 = $ 8,250

Average Stockholders’ equity = $ 110,000 { ( 110,000 + 110,000 ) / 2 }

Earnings per share (EPS) = Net income / Average no. of outstanding shares

EPS = $ 8,250 / 55,000 = $ 0.15 per share

Return on equity (ROE) = Net income / Average stockholders’ equity

ROE = $ 8,250 / 110,000 = 0.075 or 7.5 %

Answer 2.

After repurchase of 10,000 shares No. of shares outstanding stands at 45,000 shares (55,000 – 10,000).

Since, 10,000 shares repurchase for $ 2.25 per share. It means reduction in stockholder’s equity by $ 22,500 ( 10,000 * 2.25 ) . Now, balance on stockholders’ equity = $ 87,500 ( 110,000 – 22,500 )

Earnings per share (EPS) = Net income / Average no. of outstanding shares

EPS = $ 8,250 / 45,000 = $ 0.183 per share

Return on equity (ROE) = Net income / Average stockholders’ equity

ROE = $ 8,250 / 87,500 = 0.09428 or 9.43 %

Answer 3.

By repurchasing shares, a company can INCREASE both its EPS and ROE.