P12-14 Share repurchase : The following financial information is available on the Bond Recording Company: Earnings available to $ 800,000 common shareholders Number of common shares outstanding 400,000 Earnings per share ($ 800,000 +400,000) $ 2 Market price per share $ 20 Price / Earning Ratio (P/E) ($ 20 + $ 2) 10 The company is currently contemplating whether to use $ 400,000 of its earnings to pay cash dividends of $ 1 per share or to buy back shares at $ 21 per share. a. About how many shares can the company buy back at the price of $ 21 per share using the funds that would be used to pay the dividend in cash? b. Calculate EPS after repurchase. Explain your calculations. C. If the shares are sold at a price 10 times higher than the earnings, what will the market price be after the buyback? Compare the positions of the shareholders under the dividend payment and share buyback alternatives. What are the tax implications with each d. alternative?
P12-14 Share repurchase : The following financial information is available on the Bond Recording Company: Earnings available to $ 800,000 common shareholders Number of common shares outstanding 400,000 Earnings per share ($ 800,000 +400,000) $ 2 Market price per share $ 20 Price / Earning Ratio (P/E) ($ 20 + $ 2) 10 The company is currently contemplating whether to use $ 400,000 of its earnings to pay cash dividends of $ 1 per share or to buy back shares at $ 21 per share. a. About how many shares can the company buy back at the price of $ 21 per share using the funds that would be used to pay the dividend in cash? b. Calculate EPS after repurchase. Explain your calculations. C. If the shares are sold at a price 10 times higher than the earnings, what will the market price be after the buyback? Compare the positions of the shareholders under the dividend payment and share buyback alternatives. What are the tax implications with each d. alternative?
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter15: Contributed Capital
Section: Chapter Questions
Problem 14P
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