Stock Repurchases Assignment | Homework For You
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 Petroxy Company:
Petroxy Company expects to earn $5,100,000 this year. The company currently has 870,000 shares outstanding, and the shares have a per-share market price of $20. Assuming that Petroxy’s price-to-earnings (P/E) ratio remains constant and its earnings are unaffected by a share repurchase transaction, then the company’s expected market price per share—if it repurchases 70,000 shares at the current market price—should be . 22.85, or 25.02, or 21.76, or 19.58
Which of these factors are considered an advantage of a stock repurchase? Check all that apply.
Repurchases can be used to produce large-scale changes in capital structure.
A repurchase can remove a large block of stock that is overhanging the market and keeping the per-share price depressed.
The price of the firm’s stock might benefit more from cash dividends than from a repurchase. Get Finance homework help today