Question

The Dunn Corporation is planning to pay dividends of ​$480000. There are 240000 shares​ outstanding, and earnings per share are ​$5. The stock should sell for ​$50 after the​ ex-dividend date.​ If, instead of paying a​ dividend, the firm decides to repurchase​ stock,

a. What should be the repurchase​ price?

b. How many shares should be​ repurchased?

c. What if the repurchase price is set below or above your suggested price in part ​(a​)?

d. If you own 100​ shares, would you prefer that the company pay the dividend or repurchase​ stock?

Answer 1

a.

Dividend per share is: Dividends/outstanding shares = 480,000/240000 = 2

If stock sells ex-dividend for $50, then the repurchase price must be equal to its cum-dividend price, which is

=$50+$2

=$52

b.

Shares repurchased will be Earnings available to company divided by repurchase price. The earnings available will be equal to proposed dividend as this amount will not be distributed as dividend now.

=$480000/$52

=9230.7692 shares or 9231 shares

c.

If repurchase price is set below the suggested price then he may suffer loose as now even his dividend income will not be recovered.

If repurchase price is set above the suggested price then he will gain. Extra price after $52 will be his capital income.

d.

It depends on my thinking rationale. If i desire timely dividend or current income then i will prefer the company declare dividend or else repurchase is the best option as it will yield a large sum of money at the current date.