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Part A :
A company has a earning of $8,000,000 and capital budget of $8,000,000 and maintains the debt equity ratio to be 1:1 that is 50% debt and 50% equity. Company have the project capital requirement of $8,000,000 and in order to maintain debt equity ratio to 1:1 company has to pay one by two from debt and one by two from equity. In other words company has to borrow $4,000,000 and use $4,000,000 to maintain 1:1 ratio leaving the residual amount of $4,000,000 i.e; $8,000,000 - $4,000,000 which is our amount of dividend.
Part B
In order to calculate PE ratio we need to find the earning per share which can be calculated by the following formula = Net earnings / number of outstanding share
= $8,000,000 / 1,500,000 = $5.33
When we have earning per share the PE ratio would be calculated by the following formula
PE ratio = Current market price / Earnings per share = $80 / $5.33 = 15
PE ratio = 15
Part C :
After predicting the amount of dividend we can calculate the number of shares company can repurchase by the following formula
Number of share the company can repurchase = Total Dividend amount / price per share
                                                                               = $4,000,000 / $80 = 50,000
Therefore company can repurchase 50,000 shares.
Part 4 :
In order to find the expected stock price after the repurchase we need to calculate the Earning per share of the remaining share = Net earnings / number of outstanding share
Now we have the number of outstanding share as 1,500, XXXXXXXXXX,000 = 1,450,000
So the EPS after the repurchase would be = Net income / Outstanding share = $8,000,000 / 1,450,000 = $5.51
Our new EPS after repurchase is $5.51
Keeping the PE ratio at 15 the expected stock price after repurchase can be calculated with the below formula =
EPS * PE ratio = $5.51 * 15 = $82.76
Therefore our Expected stock price after repurchase = $82.76.