Answered step by step
Verified Expert Solution
Question
1 Approved Answer
6 . Stock repurchases Companies with excess cash often employ share repurchase plans in place of or along with cash dividends. Share repurchase plans can
Stock repurchases
Companies with excess cash often employ share repurchase plans in place of or along with cash dividends. Share repurchase plans can help investors liquidate their holdings by selling their stock to the issuing company and earning from capital gains.
Consider the case of Petroxy Company:
Petroxy Company has forecasted a net income of $ for this year. Its common stock currently trades at $ per share, and the company currently has shares of common stock outstanding. It has sufficient funds available to pay a cash dividend, but many of its investors don't like the additional tax liability to which the dividend income subjects them.
As a result, Petroxys management is considering making a share repurchase transaction in which it would buy back shares of its outstanding shares in the open market by paying the current market share price. Assume that the repurchase transaction will have no effect on either the company's net income or its pricetoearnings PE ratio. What is Petroxy's expected stock price after the stock repurchase transaction? Note: Round your intermediate calculation to two decimal places. Round your answer to two decimal places.
$ per share
$ per share
$ per share
$ per share
Which of these factors are considered an advantage of a stock repurchase? Check all that apply.
Repurchases can be used to produce largescale changes in capital structure.
The firm might pay too high a price for the repurchased stock.
The price of the firms stock might benefit more from cash dividends than from a repurchase.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started