Po Inc. believes that at its current share price of P16.00 the firm is undervalued.

Makeover plans to
repurchase 2.4 million of its 20 million shares outstanding. The Po Inc.’s managers expect that they can
repurchase the entire 2.4 million shares at the expected equilibrium price after repurchase. The Po
Inc.’s current earnings are P44,000,000. If management’s assumptions hold, answer the following,

1. The current earnings per share is

 Current EPS = P44,000,000 / 20,000,000 = P2.20 per share.

2. What is the price to earnings ratio?

P/E ratio = P16.00 / P2.20 = 7.27x.

3. How much is the earnings per share after the repurchase?

EPS after repurchase = P44,000,000 / 17,600,000 = P2.50.

4. What is the expected per-share market price after repurchase?

Expected market price after repurchase: 7.27 x P2.50 = P18.18 per share.