Question

Baby Fresh Diaper Service has 30,000 shares of stock outstanding at a market price of $37.50 each and earnings per share of $1.22. The firm has decided to repurchase $187,500 worth of stock. What will the PE ratio be after the repurchase, all else held constant?
Multiple Choice

25.61


25.30


24.11


26.16


27.85

Answer 1

Answer:

The first option is correct

Explanation:

The number of stock repurchased need to first of all be determined.

The number of shares repurchased is the cash paid for repurchase of shares divided market price of $37.50

Number of shares repurchased=$187,500/$37.50=5,000 shares

number of shares outstanding after repurchase=30,000-5,000=25,000 shares

revised earnings per share=previous earnings per share*previous shares outstanding/the shares outstanding after repurchase

revised earnings per share=$1.22*30,000/25000=$1.464

P/E ratio=market price per share/revised earnings per share=$37.50/$1.464=25.61