Alex, Inc Is fiNanced 100% with Equity

question 263

Multiple Choice

Alex, Inc. is financed 100% with equity. The firm has 100,000 shares of stock outstanding with a market price of $5 per share. Total earnings for the most recent year are $50,000. The firm has
Cash of $25,000 in excess of what is necessary to fund its positive NPV projects. The firm is
Considering using the cash to pay an extra dividend of $25,000 or, alternatively, to repurchase
$25,000 of stock. The firm has other assets worth $475,000 (market value) . For each of the
Questions that follow, assume there are no transaction costs, taxes, or other market imperfections.
Assume the firm uses the $25,000 excess cash to buy back stock at $5 per share. What will be the
firm's price/earnings ratio after the repurchase?

• A) 9.00
• B) 9.25
• C) 9.50
• D) 9.75
• E) 10.00

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Definitions:

Adult Heartbeat

The typical heartbeat rate for a healthy adult, ranging between 60 to 100 beats per minute.

Septum

A partition or wall separating two chambers, such as in the heart or nose.

Ventricle

A chamber of the heart or brain, in the heart it is one of two large chambers that collect and expel blood, in the brain it produces and circulates cerebrospinal fluid.

Atrium

A central room or space in a building, often open to the sky.