?Many companies use stock repurchases to increase earnings per share. For example, suppose that a company is
Question:
?Many companies use stock repurchases to increase earnings per share. For example, suppose that a company is in the following position:
The company now repurchases 200,000 shares at $200 a share. The number of shares declines to 800,000 shares and earnings per share increase to $12.50. Assuming the price?earnings ratio stays at 20, the share price must rise to $250.? Discuss.
Net profit Number of shares before repurchase Earnings per share Price-earnings ratio Share price $10 million 1 million $10 20 $200
Step by Step Answer:
One problem with this analysis is that it assumes the comp...View the full answer
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers
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Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
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