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) $3.85. C) $3.23. D) $3.32. Click for Answer and Explanation D) 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. 2.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) $3.39. B) $3.12. C) $3.36. D) $3.41. Click for Answer and Explanation C) 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. 3.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) $3.35. C) $3.33. D) $3.40. Click for Answer and Explanation C) 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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发表于 2008-4-19 18:32
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