H.M. Textile is concerned about preserving the wealth of its stockholders during a cyclic downturn in the home furnishing business. The company has maintained a constant dividend payout of $2.00 tied to a target payout ratio of 40%. Management is preparing a share repurchase recommendation to present to the board of directors. The following data have been gathered from the last two years. 2018 2019
Earnings available for common stockholders $1,260,000 $1,200,000
Number of shares outstanding 300,000 300,000
Earnings per share $4.20 $4.00
Market price per share $23.50 $23
Price/earnings ratio 5.6 5
a. How many shares should the company have outstanding in 2019 if it pays a dividend of $2.00 and the desired payout ratio is 40%?
b. How many shares would H.M. Textile have to repurchase to have the level of shares
outstanding calculated in part a.?