Problem: Keystone Enterprises just announced record 2011 EPS of $5.00, up $0.25 from last year. This is the 10th consecutive year that the company has increased its EPS, an enviable record. Unfortunately, management fears that this string of EPS increases is about to be broken. Keystone is forecasting net income for 2012 and 2013 at $10 million each year, the same level earned in 2011. The company has 2,000,000 shares of common stock outstanding, no preferred stock, and no convertible debt.
Q1. How many common shares does Keystone need to buy back at the beginning of 2012 and 2013 to maintain EPS growth of $0.25 per share each year? (Note: Keystone will use excess cash from operations to pay for the stock)
Q2. Explain why your answer to requirement 1 would change if the buy backs were to occur in the middle of each year.
Q3. Why do you think Keystone's management would be concerned about maintaining the company's record of EPS growth?