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NEW QUESTION: 1
Makeover Inc. believes that at its current stock price of $16.00 the firm is undervalued in the market.
Makeover plans to repurchase 2.4 million of its 20 million shares outstanding. The firm's managers expect that they can repurchase the entire 2.4 million shares at the expected equilibrium price after repurchase.
The firm's current earnings are $44 million. If management's assumptions hold, what is the expected market price after repurchase?
Step 1: Current EPS = $44 million/20 million = $2.20 per share.
Step 2: P/E ratio = $16.00/$2.20 = 7.27x.
Step 3: EPS after repurchase = $44 million/17.6 million = $2.50.
Step 4:Expected market price after repurchase: 7.27 x $2.50 = $18.18 per share.
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