Payout Policy and Capital Structure
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"Many companies use stock repurchases to increase earnings per share. For example, suppose that a company is in the following position:
Net profit $10 million
Number of shares before repurchase 1 million
Earnings per share $10
Price-earnings ratio 20
Share price $200
The company now repurchases 200,000 shares at $200 a share. The number of shares declines to 800,000 shares and earnings per share increase to $12.50. Assuming the price-earnings ratio stays at 20, the share price must rise to $250" Discuss.
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Solution Summary
The solution examines payout policy and capital structures. The solution examines share price rising.
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"Many companies use stock repurchases to increase earnings per share. For example, suppose that a company is in the following position:
Net profit $10 million
Number of shares before repurchase 1 million
Earnings per share $10
Price-earnings ...
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