Question

Question 1. Aretha Corporation has 8000000 Shares out standing with a market price of * 3.75 per Share. The company's board of directors has decaded to pay 60% of its last net earnings of $20,000,ooo either as Cash dividend or stock repurchase. Required (a show the effect of a cash dividend on the Corporations price earnings Ratio (4 marks] b . show how the effect of a stock re-purchase on the Corporations price earnings ratio cs marks].

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Answer 1

Aretha Corporation Solution Shares outstanding Market Price Net Earnings Cash/Dividend/Stock Re Purchase Earnings per Share 8000000 3.75 20000000 60% 2.50 Present Price Earning Ratio before Cash Dividend =Price/EPS =B6/B9 1.5 PE Ratio before cash Dividend Answer (a) Effect of Cash Dividend on PE Ratio If cash Dividend is paid then Shares outstanding Revised Earnings EPS 8000000 8000000 =C7*.40 1 =C18/C17 Balnce left after Dividend 3.75 Answer PE ratio Conclusion: PE Ratio increased from 1.5 to 3.75 Answer (b) If Stock Repurchase Shares outstanding Revised Earnings 11200000 =8000000+(12000000)/3.75 8000000 =C7*.40 Balnce left after Stock Purchase 0.714286 =C26/C25 EPS 5.25 PE Ratio Conclusion: PE Ratio increased from 1.5 to 5.25