Nelson's Inc. is considering a $120,000 stock repurchase. Currently there are 10,000 shares outstanding at a market price of $30. The P/E ratio is 15. What is the EPS after the stock repurchase?

Question

Quizplus · Accepted Answer

The EPS after the stock repurchase can be calculated by first determining the number of shares repurchased and then calculating the new EPS. With $120,000 and a share price of $30, Nelson's Inc. can repurchase 4,000 shares ($120,000 / $30), leaving 6,000 shares outstanding (10,000 - 4,000). The current earnings (E) can be found from the P/E ratio and the market capitalization before the repurchase. The market cap is $300,000 (10,000 shares * $30/share), and with a P/E ratio of 15, the earnings are $20,000 ($300,000 / 15). The new EPS is then $20,000 / 6,000 shares = $3.33.