Share buy-backs are sometimes motivated by the desire to increase earnings per share.

Kakamora Ltd recorded an operating profit of $2 million in the last financial year, it has 4 million shares on issue and the market price of the shares is $5.00 each. Kakamora Ltd announces that it will purchase 10% of each shareholder's shares at $5.00 per share.

a.calculate the Kakamora Ltd price-earnings ratio before the buy-back

b.An observer comments as follows: "Kakamora Ltd buy-back should boost its earnings per share from 50 cents to 55 cents, so with the price-earnings ratio remaining the same, the share price should increase".

i.If the observer's argument is correct, what will Kakamora Ltd share price be after the buy-back?

ii.critically evaluate the observer's argument