“Many companies use stock repurchases to increase earnings per share. For example, suppose that a company is in the following position:

Net profit $10 million Number of shares before repurchase 1 million Earnings per share $10 Price–earnings ratio 20 Share price $200 Visit us at www.mhhe.com/bma Chapter 16 Payout Policy 415 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.

AppendixLO1