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Iron Corporation is evaluating an extra dividend versus a share repurchase
Iron 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. 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.) b. What will the company's EPS and PE ratio be under the two different scenarios? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Extra dividend Repurchase a. Price per share Shareholder wealth b. EPS PE ratio
Expert Solution
Ans.
| a) | Alternative 1 | Extra Dividend | Working |
| Price Per share | $ 59.50 | 68 - ( 17,000 / 2,000) | |
| Shareholders' Wealth | $ 68.00 | ||
| Alternative 2 | Repurchase | ||
| Price Per share | $ 68.00 | ||
| Shareholders' Wealth | $ 68.00 | ||
| b) | Alternative 1 | Extra Dividend | Working |
| EPS | $ 1.40 | ||
| PE Ratio | 42.5 | 59.5/1.4 | |
| Alternative 2 | Repurchase | ||
| EPS | $ 1.60 | 1.4 * [ 2000 / ( 2000 - (17000/68))] | |
| PE Ratio | 42.5 | 68/1.6 |
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