Water Front Rentals has 20,000 shares of stock outstanding at a market price of $24 each and earnings per share of $1.84. The fi

Question

3 years ago

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Water Front Rentals has 20,000 shares of stock outstanding at a market price of $24 each and earnings per share of $1.84. The fi

rm has decided to repurchase $75,000 worth of stock. What will the PE ratio be after the repurchase, all else held constant

Business

1 answer:

OLga [1] · Answer 1 · 2021-12-29T15:29:11+03:00

Answer:

New P/E ratio = 11 .00 times

Explanation:

<em>Repurchasing the common stock would mean the company buying back certain units of of the common stock which it had earlier issued to its common stock holders. </em>

This it could do to avoid its earning per share (EPS) not been diluted.

Price earning (P/E) ratio is the ratio of the market price of a share to its Earnings per share (EPS).

P/E = Market price / EPS

Total earnings before re-purchase = EPS × number of shares before repurchase

= $1.84× 20,000 = $36,800

The units of shares re-purchased back

= Amount paid/ Market price per share

= $75,000/24 = 3,125 units

Total number of shares after repurchase = 20,000 - 3,125 = 16875 units

New EPS after repurchase= $36,800 / 23,125 units= 2.18

New P/E ratio = 24/2.18 = 11.00 times

New P/E ratio = 11 .00 times