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发表于 2010-4-15 13:59 | 只看该作者

Reading 29: Dividends and Dividend Policy-LOS c 习题精选

class, company, borrowed, center
Session 8: Corporate Finance
Reading 29: Dividends and Dividend Policy

LOS c: Calculate the earnings per share effect of a share repurchase when the repurchase is made with borrowed funds and the company's after-tax cost of debt is greater (less) than its earnings yield.

 

 

 

Pants R Us Inc.’s Board of Directors is considering repurchasing $30,000,000 worth of common stock. Pants R Us assumes that the stock can be repurchased at the market price of $50 per share. After much discussion Pants R Us decides to borrow $30 million that it will use to repurchase shares. Pants R Us’ Chief Investment Officer (CIO) has compiled the following information regarding the repurchase of the firm’s common stock:

  • Share price at the time of buyback = $50
  • Shares outstanding before buyback = 30,600,000
  • EPS before buyback = $3.33
  • Earnings yield = $3.33 / $50 = 6.7%
  • After-tax cost of borrowing = 6.7%
  • Planned buyback = 600,000 shares

Based on the information above, what will be Pants R Us’ earnings per share (EPS) after the repurchase of its common stock?

A)
 $3.28.
B)
 $3.40.
C)
 $3.33.


 

Total earnings = $3.33 × 30,600,000 = $101,898,000

Since the after-tax cost of borrowing of 6.7%% is equal to the 6.7% earnings yield (E/P) of the shares, the share repurchase has no effect on Pants R Us’ EPS.

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土豆妮

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2#
发表于 2010-4-15 13:59 | 只看该作者

Francis Investment Inc’s Board of Directors is considering repurchasing $30,000,000 worth of common stock. Francis assumes that the stock can be repurchased at the market price of $50 per share. After much discussion Francis decides to borrow $30 million that it will use to repurchase shares. Francis’ Chief Financial Officer (CFO) has compiled the following information regarding the repurchase of the firm’s common stock:

  • Share price at the time of buyback = $50
  • Shares outstanding before buyback = 30,600,000
  • EPS before buyback = $3.33
  • Earnings yield = $3.33 / $50 = 6.7%
  • After-tax cost of borrowing = 4%
  • Planned buyback = 600,000 shares

Based on the information above, after the repurchase of its common stock, Francis’ EPS will be closest to:

A)
 $3.41.
B)
 $3.36.
C)
 $3.39.


Total earnings = $3.33 × 30,600,000 = $101,898,000

Since the after-tax cost of borrowing of 4% is less than the 6.7% earnings yield (E/P) of the shares, the share repurchase will increase Francis’s EPS.

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土豆妮

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3#
发表于 2010-4-15 14:00 | 只看该作者

Sinclair Construction Company’s Board of Directors is considering repurchasing $30,000,000 worth of common stock. Sinclair assumes that the stock can be repurchased at the market price of $50 per share. After much discussion Sinclair decides to borrow $30 million that it will use to repurchase shares. Sinclair’s Chief Executive Officer (CEO) has compiled the following information regarding the repurchase of the firm’s common stock:

  • Share price at the time of buyback = $50
  • Shares outstanding before buyback = 30,600,000
  • EPS before buyback = $3.33
  • Earnings yield = $3.33 / $50 = 6.7%
  • After-tax cost of borrowing = 8.0%
  • Planned buyback = 600,000 shares

Based on the information above, Sinclair’s earnings per share (EPS) after the repurchase of its common stock will be closest to:

A)
 $3.18.
B)
 $3.32.
C)
 $3.23.


Total earnings = $3.33 × 30,600,000 = $101,898,000

Since the 8.0% after-tax cost of borrowing is greater than the 6.7% earnings yield (E/P) of the shares, the share repurchase reduces Sinclair’s EPS.

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