Page 366 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Chapter 12

Example 3

A company has 10 million $0.50 shares in issue. The company is planning to
repurchase 1 million of these shares at a price of $1.50 each. Currently, the
company's cash balance is $2 million and its earnings per share is $0.20.

What will be the cash balance and the earnings per share (EPS) after the
share repurchase?

A Cash: $1.5 million, EPS: $0.22

B Cash: $0.5 million, EPS: $0.20

C Cash: $1.5 million, EPS: $0.20

D Cash: $0.5 million, EPS: $0.22

Solution

The answer is (D)

The amount of cash required for the repurchase is 1 million shares at $1.50
each, so $1.5 million in total. Hence, cash will fall from $2 million to $0.5
million.

The new number of shares in issue will be (10 million – 1 million =) 9 million,
so assuming that earnings stay constant, the EPS will be (total earnings/
9 million).

Currently, earnings are $0.20 × 10 million = $0.20 million.

Therefore, EPS will be $0.20 million/9 million = $0.22 after the repurchase.

358