The Carlton Corporation has $5 million in earnings after taxes and 2 million shares outstanding. The stock trades at a P/E of 20. The firm has $4 million in excess cash.
a. Compute the current price of the stock.
b. If the $4 million is used to pay dividends, how much will dividends per share be?
c. If the $4 million is used to repurchase shares in the market at a price of $54 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?
f. Has the stockholder’s total wealth changed as a result of the stock repurchase as opposed to receiving the cash dividend?
g. What are some reasons a corporation may wish to repurchase its own shares in the market?