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XYZ Corporation - Managerial Finance

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XYZ Corporation has $4 million in earnings after taxes and 1 million shares outstanding. The stock trades at a P/E ratio of 20. The firm has $3 million in excess cash.

a. Compute the current price of the stock.

b. If the $3 million is used to pay dividends, how much will dividends per share be?

c. If the $3 million is used to repurchase shares in the market at a price of $83 per share, how many shares will be acquired? (Round to the nearest share.)

d. What will the new earnings per share be? (Round to two places to the right of the decimal.)

e. If the P/E ratio remains constant, what will the price of the securities be? By how much, in terms of dollars, did the repurchase increase the stock price?

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Solution Summary

This solution is comprised of a detailed calculation to find the current price of stock, dividends per share, and earnings per share.

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XYZ Corporation has $4 million in earnings after taxes and 1 million shares outstanding. The stock trades at a P/E ratio of 20. The firm has $3 million in excess cash.

A. Compute the current price of the stock.

Earnings per share = $4 million/1 million share outstanding = $4 per share

P/E ratio = ...

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