Question #45
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 17
Status: Unattempted
Question
Sinclair Construction Company's Board of Directors is considering repurchasing $30,000,000 worth of common stock. Sinclair assumes that the stock can be repurchased at the market price of $50 per share. After much discussion Sinclair decides to borrow $30 million that it will use to repurchase shares. Sinclair's Chief Executive Officer (CEO) has compiled the following information regarding the repurchase of the firm's common stock: Share price at the time of buyback = $50 Shares outstanding before buyback = 30,600,000 EPS before buyback = $3.33 Earnings yield = $3.33 / $50 = 6.7% After-tax cost of borrowing = 8.0% Planned buyback = 600,000 shares Based on the information above, Sinclair's earnings per share (EPS) after the repurchase of its common stock will be closest to:
Answer Choices:
A. $3.23
B. $3.32
C. $3.18
Explanation
Total earnings = $3.33 × 30,600,000 = $101,898,000
Since the 8.0% after-tax cost of borrowing is greater than the 6.7% earnings yield (E/P) of
the shares, the share repurchase reduces Sinclair's EPS.
(Module 15.2, LOS 15.j)
EPS after buyback =
=
=
=
= $3.32
total earnings - after-tax cost of funds
shares outstanding after buyback
$101,898,000 - (600,000 shares x $50 x 0.08)
(30,600,000 - 600,000) shares
$101,898,000 - $2,400,000
30,000,000 shares
$99,498,000
30,000,000 shares