Answer:
stock price following the stock repurchase = $74.44
Explanation:
Stock Repurchases Gamma Industries has net income of $3,800,000, and it has 1,490,000 shares of common stock outstanding.
Formula for earnings per share:
Earnings per share = Net income/ number of shares outstanding
As Number of shares outstanding before repurchase = 1490000
Net Income = $3800000
Therefore by putting the values in the above formula, we get
Earnings per Share = $3,800,000/1,490,000
Earnings per Share = $2.5503
Formula for Price Earnings Ratio:
Price Earnings Ratio = Price / Earnings per share
Therefore by putting the values in the above formula, we get
Price Earnings Ratio = $67 / $2.5503
Price Earnings Ratio = $26.2710
As the company wants to repurchase 10% of its existing outstanding shares so
Number of shares repurchase = 1,490,000 × 0.10 = 149,000
The remaining number of outstanding shares are = 1,490,000 -149,000 = 1,341,000
Formula for Earnings per Share:
Earnings per Share = Net Income / number of shares outstanding
Therefore, its Earnings per Share after repurchase = $3,800,000 / 1,341,000 = $2.8337
As Price/ Earnings = 26.27 so the stock price following the stock repurchase = 26.2710 × 2.8337 = $74.44
