Investment Analysis & Portfolio Management eleventh Edition

Problem 8:

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?