Question

The owners of H.M. Hornes Company are several wealthy Texans the company earned $ 3.5 million after taxes this year, with 1.0 Million shares outstanding, earnings per share were $ 3.50, shares have recently been sold at $ 72.00 among current shareholders . Two dollars of this value are explained by the anticipation of investors of a cash dividend. As Financial Manager of H.M. Hornes, you have completed the alternative of repurchasing some of the company's ordinary shares with an offer of auto purchase at $ 72.00 per share.

 A. How many shares could the company buy back if you select this alternative of repurchasing some of the company's ordinary shares with an offer of auto purchase at $ 72.00 per share?
B. What is the profit per share after the repurchase? 
C. What is the most convenient option between the payment of dividends in cash or repurchase?

Answer 1

A. Dividend anticipated = $2 per share
Total dividend = $2,000,000

Hence total amount avaialble for buyback = $2,000,000
Number of shares that can be bought back = $2,000,000/$72 pershare = 27,777 shares (Rounded down)

B) Total Profit = $3,500,000
Number of shares after buyback = 1,000,000-27,777 = 972,223 shares

Profit per share = 3,500,000/972,223shares = $3.60 per share (Approx)

C) Dividend is a more convenient option as buyback requires more legal formalities and procedures to be followed in comparison to those involved with paying dividend.