Case study:
E incorporation is a small company founded by Person T and Person J. They are the manufacturers of integral circuits to capitalize on the complex mixed-signal design technology. Recently, the company decided to include motherboards, PC peripheral devices, and other digital consumer electronics.
In addition to T and J, Person N who provided the capital of the company, became the third primary owner. Each of them owns 25% of 1 million shares outstanding. The employees of the company and other investors are part of the shareholders, and own the remaining shares.
The company designed the new computer motherboards, which are more effective and less expensive to manufacture; but the cost incurred to design is very high and the owners are unwilling to bring other owners. Thus, ETI sold the design to an outside firm at the rate of after-tax payment of $30 million.
Characters in the case:
Company E: Manufacturers of integral circuits.
Person T: The electronic engineer and founder of the company E.
Person J: The electronic engineer and founder of the company E.
Person N: The new owner of the Company E.
To discuss: Whether the shares repurchase will increase PE ratio,
To discuss: Whether the shares repurchase affects the value of the firm.
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Chapter 17 Solutions
Fundamentals of Corporate Finance Standard Edition
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