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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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Manal Elkhoshkhany, MBA
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  • MBA, California State University, Sacramento
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