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26 May, 03:59

Stock Repurchases Gamma Industries has net income of $3,800,000, and it has 1,490,000 shares of common stock outstanding. The company's stock currently trades at $67 a share. Gamma is considering a plan in which it will use available cash to repurchase 10% of its shares in the open market at the current $67 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?

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  1. 26 May, 05:38
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    stock price following the stock repurchase = $74.44

    Explanation:

    Stock Repurchases Gamma Industries has net income of $3,800,000, and it has 1,490,000 shares of common stock outstanding.

    Formula for earnings per share:

    Earnings per share = Net income / number of shares outstanding

    As Number of shares outstanding before repurchase = 1490000

    Net Income = $3800000

    Therefore by putting the values in the above formula, we get

    Earnings per Share = $3,800,000/1,490,000

    Earnings per Share = $2.5503

    Formula for Price Earnings Ratio:

    Price Earnings Ratio = Price / Earnings per share

    Therefore by putting the values in the above formula, we get

    Price Earnings Ratio = $67 / $2.5503

    Price Earnings Ratio = $26.2710

    As the company wants to repurchase 10% of its existing outstanding shares so

    Number of shares repurchase = 1,490,000 * 0.10 = 149,000

    The remaining number of outstanding shares are = 1,490,000 - 149,000 = 1,341,000

    Formula for Earnings per Share:

    Earnings per Share = Net Income / number of shares outstanding

    Therefore, its Earnings per Share after repurchase = $3,800,000 / 1,341,000 = $2.8337

    As Price / Earnings = 26.27 so the stock price following the stock repurchase = 26.2710 * 2.8337 = $74.44
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