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ACCA Strategic Professional · Advanced Financial Management · Strategic business and financial planning for multinational organisations

Kora Inc. has 10 million shares at $8.00 and expected EPS of $0.80, so its P/E is 10. It plans a buyback using $10m of cash earning 4% pre-tax, with tax at 25%. Assume it repurchases at $8.00 and that nothing else changes. Current total earnings are $8.0m, including the interest on this cash. What is the post-buyback EPS?

Post-buyback EPS is $0.88: 1.25 million shares are repurchased leaving 8.75 million, and earnings fall by $0.3 million of after-tax interest to $7.7 million. Dividing gives $0.88, though not listed.

  1. A$0.80
  2. B$0.9
  3. C$0.93Correct
  4. D$0.97

Explanation

Shares repurchased = 10m/8 = 1.25m, leaving 8.75m. Lost after-tax interest = 10m x 4% x 0.75 = $0.30m, so earnings = 8.0 - 0.3 = $7.7m. EPS = 7.7/8.75 = $0.88. Checking against the options shows none match, so recompute: this is wrong as written.

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