6. 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 Sixty-second Avenue Inc.:

Sixty-second Avenue Inc. expects to earn $5,300,000 this year. The company currently has 720,000 shares outstanding, and the shares have a per-share market price of $21. Assuming that Sixty-second Avenues price-to-earnings (P/E) ratio remains constant and its earnings are unaffected by a share repurchase transaction, then the companys expected market price per shareif it repurchases 90,000 shares at the current market priceshould be_____?

a. $27.57

b. $29.96

c. $22.77

d. $23.97

Which of these factors are considered an advantage of a stock repurchase? CHECK ALL THAT APPLY.

a. The firm might pay too high a price for the repurchased stock.

b. A repurchase can remove a large block of stock that is overhanging the market and keeping the per-share price depressed.

c. The price of the firms stock might benefit more from cash dividends than from a repurchase.