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?

Question

Quizplus · Accepted Answer

After the repurchase, the number of shares decreases, increasing the earnings per share (EPS). The new PE ratio is calculated by dividing the market price by the new EPS. The new EPS is $1.22 * (30,000 / (30,000 - 5,000)) = $1.22 * (30,000 / 25,000) = $1.464. The PE ratio is $37.50 / $1.464 = 25.61.

Baby Fresh Diaper Service Has 30,000 Shares of Stock Outstanding