1.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)   $3.85.

C)   $3.23.

D)   $3.32.

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.

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.

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.