1) Computation of the current price of stock:-

EPS = NET income / Number of shares

= $5,000,000 / 1,000,000

= $5

P/E Ratio = Price / EPS

10 = Price / $5

Price = 10 * $5

 = $50

 

2) Computation of the dividends per share:-

Dividend per share = Cash paid / Number of shares

= $4,000,000 / 1,000,00

= $4

 

3) Computation of the number of shares will be reacquired:-

Number of shares reacquired = Cash used / Price per share 

= $4,000,000 / $54

= 74,074.07 Or 74,074 shares

 

4) Computation of the new EPS:-

Shares outstanding after repurchase = 1,000,000 - 74,074

= 925,926 shares

New EPS = Net income / Shares outstanding after repurchase

= $5,000,000 / 925,926

= $5.40 per share

 

5) Computation of the new price:-

P/E ratio = New price / New EPS

10 = New price / $5.40

New price = $5.40 * 10

= $54

 

Computation of the change in stock price:-

Change in stock price = New stock price - Old stock price

= $54 - $50

= $4

 

6) Stockholder wealth with dividend = Stock price + Dividend income

 = $50 + $4

 = $54

Stockholder wealth with repurchase = $54

Stockholder wealth is not affected by the dividend/repurchase decision