Cycle Out has 1,000,000 shares outstanding and currently has annual earnings per share of $5.20. If Cycle's stock price is $62.40, what would be the expected stock price if Cycle repurchases 50,000 shares?
A) $65.52
B) $65.68
C) $75.72
D) Cannot be determined from the information provided

Question

Quizplus · Accepted Answer

Current market capitalization = $62.40 * 1,000,000 shares = $62,400,000
Current earnings = $5.20 * 1,000,000 shares = $5,200,000
Current P/E ratio = $62.40 / $5.20 = 12
If Cycle repurchases 50,000 shares, the number of shares outstanding will become 950,000, and the earnings per share will become $5,200,000 / 950,000 = $5.47.
Assuming the P/E ratio of 12 remains the same, the expected stock price would be $5.47 * 12 = $65.64.
However, since the company is repurchasing shares, it is likely that the market will perceive this as a positive signal and the P/E ratio may increase. Therefore, the expected stock price may be slightly higher than $65.64. The closest option is B) $65.68.

Cycle Out Has 1,000,000 Shares Outstanding and Currently Has Annual