Harte Textiles, Inc., a maker of custom upholstery fabrics, is concerned
about preserving the wealth of its stockholders during a cyclic downturn in
the home furnishings business. The company has maintained a constant dividend
payout of $2.00 tied to a target payout ratio of 40%. Management is preparing a
share repurchase recommendation to present to the firm’s board of directors. The
data at the top of the following page have been gathered from the last 2 years.
a. How many shares should the company have outstanding in 2015 if its earnings
available for common stockholders in that year are $1,200,000 and it pays a dividend
of $2.00, given that its desired payout ratio is 40%?
b. How many shares would Harte have to repurchase to have the level of shares
outstanding calculated in part a?