Question: The Carlton Corporation has $4 million in earnings after taxes and 1 million shares outstanding. The stock trades at a P/E ratio of 20. THE firm has $3 million in excess cash.
1. Compute the current price of the stock.
2. If the 3 million is used to pay dividends , how much will dividends per share be?
3. If the 3million is to repurchase shares in the market at a price of$83 per share, how many shares will be acquired? Round to the nearest share.
4. If the P/E ratio remains constant, what will the price of the securities be? By how much in terms of dollars, did the repurchase increase the stock price?
5. What will the new earning per share be? Round to two place to the right of the decimal.
6. Has the stockholder's total wealth changed as a result of the stock repurchase as opposed to receiving the cash dividends?
7. What tax advantages might there be for a stock repurchase as compared to a cash dividend?
8. What are some other reason a corporation may wish to repurchase own shares in the market?