Water Front Rentals has 20,000 shares of stock outstanding at a market price of $24 each and earnings per share of $1.84. The firm has decided to repurchase $75,000 worth of stock. What will the PE ratio be after the repurchase, all else held constant

New P/E ratio = 11 .00 times

Explanation:

Repurchasing the common stock would mean the company buying back certain units of of the common stock which it had earlier  issued to its common stock holders.

This it could do to avoid its earning per share (EPS) not been diluted.

Price earning (P/E) ratio is the ratio of the market price of a share to its Earnings per share (EPS).

P/E = Market price / EPS

Total earnings before re-purchase = EPS × number of shares before repurchase

= $1.84× 20,000 = $36,800

The units of shares re-purchased back

= Amount paid/ Market price per share

= $75,000/24 = 3,125  units

Total number of shares after repurchase = 20,000 - 3,125 = 16875  units

New EPS  after repurchase= $36,800 / 23,125 units= 2.18

New P/E ratio = 24/2.18 = 11.00 times

New P/E ratio = 11 .00 times

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