Flychucker Corporation is evaluating an extra dividend versus a share repurchase
ID: 2783217 • Letter: F
Question
Flychucker Corporation is evaluating an extra dividend versus a share repurchase. In either case $17,000 would be spent. Current earnings are $1.40 per share, and the stock currently sells for $68 per share. There are 2,000 shares outstanding. Ignore taxes and other imperfections.
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.)
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.)
Flychucker Corporation is evaluating an extra dividend versus a share repurchase. In either case $17,000 would be spent. Current earnings are $1.40 per share, and the stock currently sells for $68 per share. There are 2,000 shares outstanding. Ignore taxes and other imperfections.
Explanation / Answer
Flychucker Corporation is evaluating an extra dividend versus a share repurchase. In either case $17,000 would be spent. Current earnings are $1.40 per share, and the stock currently sells for $68 per share. There are 2,000 shares outstanding. Ignore taxes and other imperfections.
Alternative II
Shares repurchased would be 17000/68=250
New shares=2000-250=1750
If share is repurchased, they will get 68 in cash and if they dont let the share repurchase they still are worth 68
Price per share 68
Shareholder's wealth=68
EPS=2000*1.4/1750=1.6
PE=68/1.6=42.5
Alternative I
Dividends=17000/2000=8.5
Price after dividends=68-8.5=59.5
Shareholders will have 59.5 worth stock and 8.5 dividends so total shareholder's wealth=59.5+8.5=68
EPS=1.4
PE=59.5/1.4=42.5