Stokes Limited shares is trading at a price-earnings ratio of 7,5. The market price per share is

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Question:

Stokes Limited shares is trading at a price-earnings ratio of 7,5. The market price per share is R120 before the dividend payment and the price-earnings (P/E) ratio is based on this price. The company has 1 750 000 shares in issue. Stokes Limited's earnings are expected to remain constant for the foreseeable future.

Stokes Limited is considering whether to distribute sixty percent (60%) of its net income for the year as a dividend, or it could engage in a share buy-back at the current price, inclusive of the expected dividend. Neither decision is expected to have any impact on the P/E ratio.

REQUIRED:

Q.1.1 Discuss any two disadvantages of a share buy-back scheme that Stokes Limited should take into account before making an offer to shareholders.

Q.1.2 What is the net profit after tax?

Q.1.3 What is the expected share buy-back price (per share)?

Q.1.4 How many shares will be in issue after the buy-back?

Q1.5 What is the expected share price after the share buv-back it it is assumed that shares 31 will sell at the same P/E ratio as before the buy-back?

Q.1.6 List two methods that can be adopted to execute a share buy-back.