Question

Gamma Industries has net income of $1,300,000, and it has 435,000 shares of common stock outstanding. The company's stock currently trades at $41 a share. Gamma is considering a plan in which it will use available cash to repurchase 30% of its shares in the open market at the current $41 stock price. The repurchase is expected to have no effect on net income or the company's P/E ratio. What will be its stock price following the stock repurchase? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

Figures in millions (m).  

Net income = 1.3 m

Number of shares outstanding = 0.435m

The current price per share =$41

Price to earnings ratio =

(Price per share x number of shares outstanding)/net income

=(41*0.435)/1.3

= 13.72

Price to earnings ratio remains the same.

Net income is not affected.

Number of shares outstanding decreases = 0.435×(1-0.3) =0.3045 m

The new price per share = Np

P/E =

(New Price per share x new number of shares outstanding)/net income

13.72 =(Np*0.3045)/1.3

Np =$58.57

Stock price following the stock repurchase is $58.57