Sixty-second Avenue Inc. expects to earn $5,700,000 this year. The company currently has 790,000 shares outstanding, and the shares have a per-share market price of $21. Assuming that Sixty-second Avenue's price-to-earnings (P/E) ratio remains constant and its earnings are unaffected by a share repurchase transaction, then the company's expected market price per share-if it repurchases 90,000 shares at the current market price-should be

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Business

Kenneth Swanson

17 March, 02:49

Sixty-second Avenue Inc. expects to earn $5,700,000 this year. The company currently has 790,000 shares outstanding, and the shares have a per-share market price of $21. Assuming that Sixty-second Avenue's price-to-earnings (P/E) ratio remains constant and its earnings are unaffected by a share repurchase transaction, then the company's expected market price per share-if it repurchases 90,000 shares at the current market price-should be

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Ace · Answer 1

The company's expected market price per share After the repurchase would $23.68

Explanation:

In order to calculate the company's expected market price per share After the repurchase we would have to calculate first the Price-to-earnings ratio (P/E ratio) as follows:

Price-to-earnings ratio (P/E ratio) = Market price per share / Earnings per share

Earnings per share = Earnings / number of shares outstanding = $ 5,700,000 / $790,000 = $ 7.21

Therefore, Price - to-earnings ratio = $ 21 / $ 7.21 = 2.91

If 90,000 shares are repurchased, Therefore Earnings per share = $ 5,700,000 / $700,000 = $ 8.14

Therefore, the company's expected market price per share After the repurchase=$ 8.14 x 2.91 = $23.68