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8 December, 20:00

Baby Fresh Diaper Service has 30,000 shares of stock outstanding at a market price of $37.50 each and earnings per share of $1.22. The firm has decided to repurchase $187,500 worth of stock. What will the PE ratio be after the repurchase, all else held constant?

Multiple Choice

25.61

25.30

24.11

26.16

27.85

+4
Answers (1)
  1. 8 December, 20:26
    0
    The first option is correct

    Explanation:

    The number of stock repurchased need to first of all be determined.

    The number of shares repurchased is the cash paid for repurchase of shares divided market price of $37.50

    Number of shares repurchased=$187,500/$37.50=5,000 shares

    number of shares outstanding after repurchase=30,000-5,000=25,000 shares

    revised earnings per share=previous earnings per share*previous shares outstanding/the shares outstanding after repurchase

    revised earnings per share=$1.22*30,000/25000=$1.464

    P/E ratio=market price per share/revised earnings per share=$37.50/$1.464=25.61
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