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Flychucker Corporation is evaluating an extra dividend versus a share repurchase
Flychucker Corporation is evaluating an extra dividend versus a share repurchase. In either case, $6,675 would be spent. Current earnings are $2.80 per share and the stock currently sells for $67 per share. There are 1,500 shares outstanding. Ignore taxes and other imperfections in answering parts (a) and (b).
(a)Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth.
(b)What will be the effect on the company's EPS and PE ratio under the two different scenarios?
Expert Solution
a.)
cash dividend:
DPS = 6675/ 1500shares
= $4.45
PX = $67 - 4.45
= $62.55 per share
wealth of a shareholder = $62.55+ $4.45 cash
= $67
repurchase:
=$6675/ $67
= 99.627
If we choose to let our shares be repurchased, we have $62.55 in cash; if we keep our shares, they're still worth $67
b.)
dividends:
EPS = $2.80;
P/E = $62.55/ $2.80
= 22.34
repurchase:
EPS = $2.80*(1500)/(1500- 99.627)
= $ 2.999
P/E = $67/$ 2.999
= 22.34
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