The Carlton Corporation has $5 million in earnings after taxes and 2 million shares outstanding. The stock trades at a P/E of 20. The firm has $4 million in excess cash. a. Compute the current price of the stock?
b. If the 4 million is used to pay dividends, how much will dividends per share be?
c. If the 4 million is used to repurchase shares in the mrket at a price of 54 per share, how many shares will be acquired?
d. What will the new earnings per share be?
e. If the P/E ratio remains constant, what will the price of the securities be? By how much, in terms of dollars, did the repurchase increase the stock price?
f. Has the stockholders' total wealth changed as a result of the stock repurchase as opposed to receicing the cash dividend?
g. What are some reasons a corporation may wish to repurchase its own shares in the market?