Chapter 15, Problem 3P

### Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Chapter
Section

### Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

# 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 net income or its stock price. What will be Beta’s EPS following the stock repurchase?

Summary Introduction

To calculate: Beta’s EPS following the stock repurchase.

Share Repurchase:

When a company issues its shares in the open market and finds that the share issued by the company are undervalued, the management decides to buy back its own shares to decrease the number of shares outstanding.

Explanation

Calculate number of stock repurchased.

Given,

Number of outstanding shares are 1,000,000.

Percentage of repurchase of shares is 20%.

Formula to calculate number of stock repurchased,

Numberofstockrepurchase=Outstandingshares×%ofrepurchaseofshares

Substitute 1,000,000 for outstanding shares and 20% for repurchase of shares.

Numberofstockrepurchase=1,000,000×20%=200,000

So, total number of shares repurchase is 200,000.

Calculate repurchase amount at current price of $32. Given, Number of repurchased shares is 200,000. Current stock price is$32.

Formula to calculate repurchase amount at current price,

Repurchaseamount=Numberofrepurchaseshares×currentstockprice

Substitute 200,000 for repurchase shares and $32 for current stock price. Repurchaseamount=200,000×$32=$6,400,000 So repurchase amount of shares is$6,400,000.

Calculate old EPS.

Given,

Number of outstanding shares is 1,000,000.

Net income is $2,000,000. Formula to calculate old EPS, EPSOld=NetincomeNumberofsharesoutstanding Substitute 1,000,000 for outstanding shares and$2,000,000 for net income.

EPSOld=$2,000,0001,000,000=$2

So, old EPS is \$2

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