Question

Flychucker Corporation is evaluating an extra dividend versus a share repurchase. In either case $18,000 would be spent. Current earnings are $1.70 per share, and the stock currently sells for $64 per share. There are 4,000 shares outstanding. Ignore taxes and other imperfections.

a.	Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth per share. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Alternative I	Extra dividend
Price per share_____	$
Shareholder wealth____	$

Alternative II	Repurchase
Price per share_________	$
Shareholder wealth_____	$

b.	What will be the effect on the company’s EPS and PE ratio under the two different scenarios? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Cash dividend
EPS________	$
PE ratio_______

Share repurchase
EPS________	$
PE ratio ______

Answer 1

Alternative I (Extra dividend) Calculate the price per share Amount spent Outstanding shares Price per share-Stock price- $18,000 4.000 $64 $59.50 Calculate the shareholder wealth. Amount spent Outstanding shares Shareholder wealth - Price per share + = $59.50-1 $18,000 4.000 - S55.00 Alternative II (Repurchase) Here, the price per share will be the current price i.e. S64and the shareholder wealth will also be 564 Cash dividend Here, the EPS is S1.7 Calculate the P/E ratio P/E ratio Extra Dividend EPS S59.50 $1.70 35.00 Share repurchase

First, calculate the shares repurchase ares repurchase Amount spent Price per share $18,000 S64 = 281.25 Now, calculate the EPS Current earningsxno. of shares (No. of shares - Shares repurchased) $1.70×4,000 EPS- =(4,000-281.25) $1.828571 or S1.83 Calculate the P/E ratio Stock price EPS S64 S1.828571 1 P/E Ratio- 35.00