Question: Box 13.5 in this chapter demonstrated how stock repurchases and leverage changes can increase earnings- per-share growth. Answer the following questions regarding the effect of

Box 13.5 in this chapter demonstrated how stock repurchases and leverage changes can increase earnings- per-share growth. Answer the following questions regarding the effect of the stock repurchase.

a. Why does the stock repurchase have no effect on the per-share value of the equity?

b. Why does forecasted earnings for Year I decrease from $10.00 million to $7.50 million?

c. Why does forecasted EPS for Year I increase while forecasted earnings decrease?

d. The required return prior to the stock repurchase was 10 percent. What is the required return for the equity after the stock repurchase?

e. What is the expected residual earnings (on equity) for Year I after the repurchase?

f. Forecast the value of the equity at the end of Year 1 for both the case with no leverage and the case with leverage.

g. Forecast the P/E at the end of Year I for both the case with no leverage and the case with leverage. Why are they different?

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a The repurchase was at fair value value received was equal to value surrendered So there is no effect on value More technically the value of the equity is driven by the value of the operations and th... View full answer

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