Fin 8091
1. Hole Foods Donuts, Ltd. has generated profits of $2 per share for many years and has consistently paid 100% of those profits to shareholders via a dividend. Investors do not expect Hole Foods Donuts to grow in the future. The company has 200,000 shares of stock outstanding worth $20 per share. Suppose the firm decides to eliminate its dividend and instead use the money to repurchase shares.
A. Assuming that there are no taxes and that the repurchase announcement conveys no new information to investors about the profitability or risk of Hole Foods Donuts, how do you think the stock price will react to announcement? Provide a written (in words) explanation or a numerical example to provide support for your answer.
If there are no taxes the profit may increase
As the repurchase announcement conveys no new information to investors about the profitability or risk it will be a good idea as the investors do not expect Hole Foods Donuts to grow in future
But with no tax and repurchase of share will increase the share value and investors will assuming that company is earning more profit and growing in speed.
B. How many shares will Hole Foods Donuts repurchase?
Total Number of Shares: - 200,000 Share Price: - $ 2/ share
Total Share Price: - Total Number of Share X Per Share Price = Total Share Price 200,000 X 2 = $ 400,000
Therefore,
No. Share Repurchase: - Total share Price ÷ Outstanding Share price = No. of Share can Buy 400,000 ÷ 20 = 20,000 Shares
C. If the signalling argument for repurchases is valid, what stock price would you expect for Hole Foods Donuts one and two years after this announcement? What would the stock price have been in the next
A. Assuming that there are no taxes and that the repurchase announcement conveys no new information to investors about the profitability or risk of Hole Foods Donuts, how do you think the stock price will react to announcement? Provide a written (in words) explanation or a numerical example to provide support for your answer.
If there are no taxes the profit may increase
As the repurchase announcement conveys no new information to investors about the profitability or risk it will be a good idea as the investors do not expect Hole Foods Donuts to grow in future
But with no tax and repurchase of share will increase the share value and investors will assuming that company is earning more profit and growing in speed.
B. How many shares will Hole Foods Donuts repurchase?
Total Number of Shares: - 200,000 Share Price: - $ 2/ share
Total Share Price: - Total Number of Share X Per Share Price = Total Share Price 200,000 X 2 = $ 400,000
Therefore,
No. Share Repurchase: - Total share Price ÷ Outstanding Share price = No. of Share can Buy 400,000 ÷ 20 = 20,000 Shares
C. If the signalling argument for repurchases is valid, what stock price would you expect for Hole Foods Donuts one and two years after this announcement? What would the stock price have been in the next
References: Book Compute the NPV, IRR, and Payback Period Accounting Rate of Return [Kindle Edition] HomeworkHelp classof1 (Author) Links http://accountingexplained.com/managerial/capital-budgeting/irr http://www.calkoo.com/?lang=3&page=26 http://www.investopedia.com/terms/p/paybackperiod.asp