Ford Motor is evaluating an extra dividend versus a share repurchase. In either case $20,000 would be spent. Current earnings are $6.0 per share, and the stock currently sells for $40 per share. There are 4,000 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 Ford Motor's EPS and PE ratio under the two different scenarios? c. In the real world, which of these actions would you recommend? Why?
Ford Motor is evaluating an extra dividend versus a share repurchase. In either case $20,000 would be spent. Current earnings are $6.0 per share, and the stock currently sells for $40 per share. There are 4,000 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 Ford Motor's EPS and PE ratio under the two different scenarios? c. In the real world, which of these actions would you recommend? Why?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
![Ford Motor is evaluating an extra dividend
versus a share repurchase. In either case
$20,000 would be spent. Current earnings are
$6.0 per share, and the stock currently sells
for $40 per share. There are 4,000 shares
outstanding. Ignore taxes and other
imperfections in answering parts (a) and (b).
Evaluate the two alternatives in terms of
the effect on the price per share of the stock
and shareholder wealth.
a.
b. What will be the effect on Ford Motor's
EPS and PE ratio under the two different
scenarios?
C. In the real world, which of these actions
would you recommend? Why?
formulation:
DPS= Tol Div (or excess cash) / No. of share
[for unlevered firm] Share price = V/no. of
share
P ex-div = P - DPS
EPS= Earnings (assume a constant) / no. of
share
P.E. = stock price/ EPS
No. of share repurchase = Excess Cash / Stock
Price](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3d49a1bf-def0-472f-94db-660c9693a140%2F440caa4e-4d0e-4ec7-a40e-012a11bb4336%2Frr012rm_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Ford Motor is evaluating an extra dividend
versus a share repurchase. In either case
$20,000 would be spent. Current earnings are
$6.0 per share, and the stock currently sells
for $40 per share. There are 4,000 shares
outstanding. Ignore taxes and other
imperfections in answering parts (a) and (b).
Evaluate the two alternatives in terms of
the effect on the price per share of the stock
and shareholder wealth.
a.
b. What will be the effect on Ford Motor's
EPS and PE ratio under the two different
scenarios?
C. In the real world, which of these actions
would you recommend? Why?
formulation:
DPS= Tol Div (or excess cash) / No. of share
[for unlevered firm] Share price = V/no. of
share
P ex-div = P - DPS
EPS= Earnings (assume a constant) / no. of
share
P.E. = stock price/ EPS
No. of share repurchase = Excess Cash / Stock
Price
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