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
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 $45. 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?
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