Practical session 13/04/2020

Task # 2

Please calculate and answer the questions. The answer will be evaluated as absolutely
correct if you will list all steps of the calculations.

One corporation is planning a share repurchase. Help corporation managers review

various scenarios with the following input data:

The number of share repurchase that the corporation planning ($ million) 120
Current stock price per share ($ per share) 20
The number of shares outstanding prior to the repurchase ($ million) 18
Earnings per share without the repurchase ($ per share) 3
The book value per share ($) 20
2.1. What is the earnings per share under each of the following two scenarios?
Scenario 1: Use idle cash on hand
Net income=3*18=54 million
EPS=54/(18-4)=3.8 per share
Scenario 2: Borrow funds at after-tax rate of 8 %
Net income=3*18-(0.08*120)=44.4 million
EPS=44.4/(18-4)=3.17 per share
2.2. Make calculations considering that when the market price per share is greater
than the book value per share (BVPS), the book value per share of equity will
decrease with a share repurchase; and having such additional data:
The book value per share ($) 17
Scenario 1:
Book value=17*18-120=186 million
BVPS=186/(18-4)=13.3 per share

Scenario 2:
Book value=17*18-120-6=180 million
BVPS=180/18-4=13 per share