Lester's has a market value balance sheet as shown below.The firm currently has 7,500 shares of stock outstanding at a price per share of $40.Net income is $9,500. The firm has decided to repurchase $20,000 worth of its outstanding stock.What will the firm's PE ratio be after this repurchase,all else held constant?

Question

Lester's has a market value balance sheet as shown below.The firm currently has 7,500 shares of stock outstanding at a price per share of $40.Net income is $9,500.  The firm has decided to repurchase $20,000 worth of its outstanding stock.What will the firm's PE ratio be after this repurchase,all else held constant?

Quizplus · Accepted Answer

Number of outstanding shares = 7,500 - ($20,000/$40) = 7,000 shares; Earnings per share = $9,500/7,000 = $1.35714; PE ratio = $40/$1.357143 = 29.47.

Lester's Has a Market Value Balance Sheet as Shown Below