The Belton Corporation has $5 million in earnings after taxes and 1 million shares outstanding. The stock trades at a P/E of 10. The firm has $4 million in excess cash.
a. Compute the current price of the stock.
b. If the $4 million is used to pay dividends, how much will dividends per share be?
c. If the $4 million is used to repurchase shares in the market at a premium price of $54 per share, how many shares will be reacquired? (Round to the nearest share.)
d. What will the new EPS be?
e. If the P/E remains constant, what will the new price of the securities be? By how much, in terms of dollars, did the repurchase increase the share price?
f. Has the shareholder's total wealth changed as a result of the stock repurchase as opposed to the cash dividend?
g. From the shareholder's perspective, is there any major tax advantage to tendering one's shares versus the receipt of cash dividends?
h. What are some other reasons a corporation may wish to repurchase its own shares in the market?