Asked by miriam canela on May 10, 2024
Verified
Nelson's Inc. is considering a $120,000 stock repurchase. Currently there are 10,000 shares outstanding at a market price of $30. The P/E ratio is 15. What is the EPS after the stock repurchase?
A) $1.20
B) $2.00
C) $2.67
D) $3.33
E) $3.67
Stock Repurchase
A financial transaction in which a company buys back its own shares from the marketplace, reducing the amount of outstanding stock.
P/E Ratio
The price-to-earnings ratio, a valuation metric for stocks calculated by dividing the market value per share by its earnings per share.
EPS
Earnings Per Share, a measure of a company's profitability that is calculated by dividing its net income by the number of outstanding shares.
- Analyze how stock repurchases influence earnings per share and the market value of shares.
- Evaluate the per-share profits before and after engagements in corporate actions such as distributing dividends, buying back shares, and executing splits.
Verified Answer
PB
PATRICK BUNDUMay 13, 2024
Final Answer :
D
Explanation :
The EPS after the stock repurchase can be calculated by first determining the number of shares repurchased and then calculating the new EPS. With $120,000 and a share price of $30, Nelson's Inc. can repurchase 4,000 shares ($120,000 / $30), leaving 6,000 shares outstanding (10,000 - 4,000). The current earnings (E) can be found from the P/E ratio and the market capitalization before the repurchase. The market cap is $300,000 (10,000 shares * $30/share), and with a P/E ratio of 15, the earnings are $20,000 ($300,000 / 15). The new EPS is then $20,000 / 6,000 shares = $3.33.
Learning Objectives
- Analyze how stock repurchases influence earnings per share and the market value of shares.
- Evaluate the per-share profits before and after engagements in corporate actions such as distributing dividends, buying back shares, and executing splits.