Everystate Inc. is evaluating an extra dividend versus a share repurchase. In either case, $9,000 would be spent. Current earnings are $1.30 per share and the stock currently sells for $64 per share. There are 1,000 shares outstanding. In answering the questions that follow, ignore taxes for the first two Evaluate the two choices in terms of their effect on the price per share of stock and shareholder wealth What will be the effect on Everystate’s EPS and P/E ratio under the two different scenarios? In the real world, which of these choices will you recommend? Why? At present, total dividends for each of the next two years are set equal to the cash flow of $10,000 per year. There are 100 shares outstanding, so the dividend per share is $100. The price per share at the moment is $173.55 and the required return of investors is 10%. There is an alternative choice of paying $11,000 total dividends in the first year ($110 per share), followed by a liquidating dividend of $8,900 ($89 per share) in the second. You prefer the first alternative but the firm’s management adopts the second alternative. You have 50 shares to begin with and if you choose to create homemade dividends, how many shares will you have at the end of the first year?
Everystate Inc. is evaluating an extra dividend versus a share
repurchase. In either case, $9,000 would be spent. Current
earnings are $1.30 per share and the stock currently sells for
$64 per share. There are 1,000 shares outstanding. In answering
the questions that follow, ignore taxes for the first two
Evaluate the two choices in terms of their effect on the
price per share of stock and shareholder wealth
What will be the effect on Everystate’s EPS and P/E ratio
under the two different scenarios?
In the real world, which of these choices will you
recommend? Why?
At present, total dividends for each of the next two years are
set equal to the cash flow of $10,000 per year. There are 100
shares outstanding, so the dividend per share is $100. The price
per share at the moment is $173.55 and the required return of
investors is 10%. There is an alternative choice of paying
$11,000 total dividends in the first year ($110 per share),
followed by a liquidating dividend of $8,900 ($89 per share) in
the second. You prefer the first alternative but the firm’s
management adopts the second alternative. You have 50 shares to
begin with and if you choose to create homemade dividends, how
many shares will you have at the end of the first year?
Step by step
Solved in 2 steps
