Question

The Cincinnati Chili Kitchen has just announced the repurchase of $95,000 of its stock. The company has 33,000 shares outstanding and earnings per share of $3.17. The company stock is currently selling for $75.31 per share. What is the price–earnings ratio after the repurchase?

Answer 1

1) No. of stock repurchased= $ 95000/75.31= 1261.43 shares

Remaining shares= 33000 - 1261.43 = 31738.55 shares

2) Earnings according to the data given are : EPS * no. of shares originally = 3.17 * 33000 = $ 104, 610

3) P/E ratio before repurchase = 75.31/3.17 = 23.757 times

This means that price of share is 23.75 times earnings per share.

Now after the repurchase, considering earnings remain same

4) Revised EPS: = 104, 610/ 31,738.55 = 3.296

5) revised price of share = 3.296 * 23.75 = 78.30

6) Revised P/E : 78.30/3.296 = 23.75 ( P/E = Price per share/ earnings per share)