Chapter 15, Problem 3P

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# STOCK REPURCHASES Gamma Industries has net income of $3,800,000, and it has 1,490,000 shares of common stock outstanding. The company's stock currently trades a t$67 a share. Gamma is considering a plan in which it will use available cash to repurchase 10% of its shares in the open market at the current $67 stock price. The repurchase is expected to have no effect on net income or the company's P/E ratio. What will be its stock price following the stock repurchase? Summary Introduction To calculate: Company G’s stock price following the stock repurchase. Introduction: 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 1,490,000. Percentage of repurchase of shares is 10%. Formula to calculate number of stock repurchased, Numberāofāstockārepurchase=OutstandingāsharesĆ%āofārepurchaseāofāshares Substitute 1,490,000 for outstanding shares and 10% for repurchase of shares. Numberāofāstockārepurchaseā=1,490,000Ć10%=149,000 So, total number of shares repurchase is 149,000. Calculate repurchase amount at current price of$67.

Number of repurchased shares is 149,000 (calculated above).

Current stock price is $67 (given). Formula to calculate repurchase amount at current price, Repurchaseāamountā=NumberāofārepurchaseāsharesĆcurrentāstockāprice Substitute 149,000 for repurchase shares and$67 for current stock price.

Repurchaseāamountā=149,000Ć$67=$9,983,000

So repurchase amount of shares is $9,983,000. Calculate old Earning per Share. Given, Number of outstanding shares is 1,490,000. Net income is$3,800,000.

Formula to calculate old EPS,

Substitute $3,800,000 for net income, and 1,490,000 for outstanding shares. EPSOld=$3,800,0001,490,000=$2.55 So,old EPS is$2.55.

Calculate old P/E (price-earning) ratio.

Current stock price is $67 (given). Old EPS is$2.55 (calculated above).

Formula to calculate old P/E ratio,

P/EOld=CurrentāstockāpriceEPSOld

Substitute \$2

### Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

#### The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

#### What is meant by business ethics?

Foundations of Business (MindTap Course List)

#### Why do economists make assumptions?

Brief Principles of Macroeconomics (MindTap Course List)

#### Explain how a change in sales mix can change a companys break-even point.

Managerial Accounting: The Cornerstone of Business Decision-Making

#### CAMPUS DELI INC. OPTIMAL CAPITAL STRUCTURE Assume that you have just been hired as business manager of Campus D...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

#### Explain the separate entity concept.

College Accounting (Book Only): A Career Approach

#### What is a focused value stream?

Cornerstones of Cost Management (Cornerstones Series)