Question 2 Share buy-backs are sometimes motivated by the desire to increase earnings per share. Falcon Ltd recorded an operating profit of $2 million in the last financial year. It has 4 million shares on issue and the market price of the shares is $5 each. Falcon announces that it will repurchase 10 per cent of each shareholder's shares at $5 per share. a. Calculate Falcon's price-earnings ratio before the buy-back. b. An observer comments as follows: 'Falcon's buy-back should boost its earnings per share from 50 cents to 55 cents, so with the price-earnings ratio remaining the same, the share price should increase'. (i) If the observer's argument is correct, what will Falcon's share price be after the buy- back? (ii) Critically evaluate the observer's argument.