Question

If the Company ABC has the following financial information: Net Income (NI) = $2,000,000; Shares of outstanding = 1,000,000; current stock price (P0) = $32; Repurchase ratio = 20% of the total shares of outstanding; what would be the Company’s new stock price (New P0)?

Answer 1

Calculation of the new stock price:

Step 1: Calculation of rate of return:

Rate of return = EPS/ Current price

= ($2,000,000 / 1,000,000) / $32

= $2 / $32

= 0.0625 or 6.25%

Step 2: New EPS after repurchase of shares

New EPS = Net income / Shares outstanding after repurchase

=$2,000,000 / 800,000

= $2.50 per share

Step 3: New Share price = New EPS / Rate of return

= $2.50 / 6.25%

= $40 per share (Answer)

Note: Share repurchase is 20%, Remaining share outstanding after repurchase will be 1000,000 x (1- 0.20) i.e. 800,000 shares.