Stock repurchase The following financial data on the Bond Recording Company are available:
Earnings available for common stockholders $800,000
Number of shares of common stock outstanding 400,000
Earnings per share ($800,000, 400,000) $2
Market price per share $20
Price/earnings (P/E) ratio ($20, $2) 10
The firm is currently considering whether it should use $400,000 of its earnings to pay cash dividends of $1 per share or to repurchase stock at $21 per share.
a. Approximately how many shares of stock can the firm repurchase at the $21-pershare price, using the funds that would have gone to pay the cash dividend?
b. Calculate the EPS after the repurchase. Explain your calculations.
c. If the stock still sells at 10 times earnings, what will the market price be after the repurchase?
d. Compare the pre- and post repurchase earnings per share.
e. Compare and contrast the stockholders’ positions under the dividend and repurchase alternatives. What are the tax implications under each alternative?