A stock is currently trading for $35. The company has a price-earnings multiple of 10. There are

Question:

A stock is currently trading for $35. The company has a price-earnings multiple of 10. There are 100 million shares outstanding. Your model indicates that the stock is actually worth $25. The company announces that it will use $300 million to repurchase shares.

a. After the repurchase, what is the value of the stock, according to your model?

b. After the repurchase, what is the actual price-earnings multiple of the stock?

c. If the company had used the $300 million to pay a cash dividend instead of doing a repurchase, how would the value of the stock have changed, according to your model?

d. If the company had used the $300 million to pay a cash dividend instead of doing a repurchase, what would be the actual price-earnings multiple after the dividend?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...

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