Question

In: Accounting

Stock Repurchases – Beta Industries has net income of $2,000,000, and it has 1,000,000 shares of...

Stock Repurchases – Beta Industries has net income of $2,000,000, and it has 1,000,000 shares of common stock outstanding. The company’s stock currently trades at $32 a share. Beta is considering a plan in which it will use available cash to repurchase 20% of its shares in the open market. The repurchase is expected to have no effect on new income or the company’s P/E ratio. What will be Beta’s stock price following the stock repurchase?

Solutions

Expert Solution

Stock repurchase is the process in which the company buy back its own shares from the market, this is done by the companies to increase the EPS, and to benefit from the decrease share prices.

When shares are repurchased number of o/s common shares reduced and Earning per shares will increase that will cause share prices to improve.

Current EPS = Net income/ number of common share o/s

                      = 2000000/1000000

                       = $2 per share

20% of the share will be repurchases by the company, so 1000000* .2 = 200000 shares will be repurchased.

Number of o/s shares = 1000000 – 200000 = 800000

Now new EPS = 2000000/800000

                          = $2.5 /share

Price earning ratio = Stock price/ EPS

                                  = 32/ 2

                                    = 16

The Price earning ratio will not change after stock repurchase, so it will remain same when EPS has increased to 2.5

Price earning ratio = Stock price/ EPS

16 = Stock price/2.5

Stock price = 16 * 2.5

                     = 40

So the price of the stock will increase to $40.

-----------------------------------------------------------------------------------------------------------------

Hope this answer your query.

Feel free to comment if you need further assistance. J


Related Solutions

The ________ reflects changes due to stock issues/repurchases and the amount of net income that the...
The ________ reflects changes due to stock issues/repurchases and the amount of net income that the firm has retained; illustrating how the company is managing it's earnings. Income Statement Statement of Stockholders Equity Statement of Cash Flows Balance Sheet
Assume that Beta Corp. earns net income of $1,000,000 in the current year. Identify two important...
Assume that Beta Corp. earns net income of $1,000,000 in the current year. Identify two important factors that investors should consider in evaluating the reasonableness of this dollar amount. Explain what investors may learn from each of these considerations.
Hobbie Craft industries was authorized to issue 1,000,000 shares of $3 par common stock, and 300,000...
Hobbie Craft industries was authorized to issue 1,000,000 shares of $3 par common stock, and 300,000 shares of 6% $50 par, "cumulative" and non-participating preferred stock. Presented below, is information pertaining to their first 2 years of operation: 2008: Jan 3rd Issued 400,000 shares of common at $11 per share Jan 4th Issued 80,000 shares of preferred at $100 per share May 1st Exchange 20,000 shares of common for land having a current appraised market value of $260,000 Dec 31st...
Boeing had $1,000,000 net income in 2018. On January 1, 2018, there were 200,000 shares of...
Boeing had $1,000,000 net income in 2018. On January 1, 2018, there were 200,000 shares of common stock outstanding. There are 30,000 options to buy common stock at $40 a share outstanding. The market price of the common stock averaged $50 during 2018. The tax rate is 30%. During 2018, there were 40,000 shares of preferred stock outstanding. The preferred is $100 par, pays $3.50 a year dividend. Boeing issued $2,000,000 of 8% convertible bonds at face value during 2017....
a company has the following at January 1, 2018 2,000,000 shares of common stock issued and...
a company has the following at January 1, 2018 2,000,000 shares of common stock issued and $1 par outstanding 4,000,000 shares authorized Additional paid in capital $5,750,000 retained earnings $12,345,000 During 2018 the following happened Net income: $6,789,000 cash dividend declared May 15: $.70 per share cash dividends paid on Jun 30th stock dividends declared on November 30th : 17% stock dividend distributed on 12/31 the market price of the stock has been $36 all year Prepare journal entries to...
A firm has 2,000,000 shares of stock outstanding, total debt of $3,000,000 at an annual interest...
A firm has 2,000,000 shares of stock outstanding, total debt of $3,000,000 at an annual interest rate of 8% and annual depreciation expense of $300,000, and is considering borrowing an additional $6,000,000 at 8% and buying back one-half of those shares. Assuming EBIT of $1.2 million, what is this company’s cash coverage ratio (a) before and (b) after the proposed restructuring? What can you conclude about the impact of financial leverage on a firm’s cash coverage ratio?
Coronado Industries has issued 2,300 shares of common stock and 460 shares of preferred stock for...
Coronado Industries has issued 2,300 shares of common stock and 460 shares of preferred stock for a lump sum of $87,000 cash. Give the entry for the issuance assuming the par value of the common stock was $5 and the fair value $30, and the par value of the preferred stock was $40 and the fair value $50. (Each valuation is on a per share basis and there are ready markets for each stock. Give the entry for the issuance...
You are interested in purchasing an apartment complex for $2,000,000 that has Net Operating Income (NOI)...
You are interested in purchasing an apartment complex for $2,000,000 that has Net Operating Income (NOI) of $120,000 and is financed with an 80% LTV mortgage at 4% 1. What is the Cap Rate? 2. What is the ROA? 3. What is the leverage ratio? 4. Approximate the ROE
Stock repurchases are transactions in which a firm buys back shares of its own stock, thereby...
Stock repurchases are transactions in which a firm buys back shares of its own stock, thereby (maintianing,increasing,decreasing) shares outstanding, (maintianing,increasing,decreasing) EPS, and often (maintianing,increasing,decreasing) the stock price. There are three principal types of stock repurchases. (1) Situations where a firm has cash available for shareholder distributions and it distributes the cash by repurchasing shares rather than paying cash dividends. (2) Situations where the firm concludes that its capital structure is too heavily weighted with equity, and it sells debt and...
Net income for the company for the year was $300,000, and 100,000 shares of common stock...
Net income for the company for the year was $300,000, and 100,000 shares of common stock were outstanding during the year. The income tax rate is 30%. For each of the following potentially dilutive securities, perform the shortcut antidilution test to determine whether the security is dilutive. Assume that each of the securities was issued on or before January 1. Treat each security independently; in other words, when testing one security, assume that the others do not exist.      (10)...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT