assignment 4

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St. John's University *

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3311

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Finance

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Jan 9, 2024

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Uploaded by DeanBatMaster402 on coursehero.com

Problem 19.3 Flychucker Corporation is evaluating an extra dividend versus a share repurchase. In either case $5,500 would be spent. Current earnings are $.95 per share, and the stock currently sells for $30 per share. There are 230 shares outstanding. Ignore taxes and other imperfections. a. What will be the effect on Flychucker’s EPS and PE ratio under the two different scenarios? 7 points Scenario 1 New dividend = $5500/230 = $23.91 per share · Note: from retained earnings New EPS =23.91 + .95 = $24.86 per share P/E Ratio = $30/$24.86 = 1.207 · Alternatively: = 6900 / (5500 + 230.95) =1.207 Scenario 2 Share repurchases decrease the shares outstanding, increasing the EPS, decreasing the P/E ratio. Repurchase amount = 5500/30 = 183.33 New shares outstanding = 230 – 183.33 = 46.67 shares Earnings, pre-repurchase = $0.95 * 230 = $230.95 New EPS = .95 / 46.67 = $4.68 per share P/E Ratio = $30/4.68 = 6.41 · Assuming Price per share remains the same after repurchase b. In the real world, which of these actions would you recommend? Why? 3 points

Despite the numbers, in the real world I would suggest the share repurchase . While a dividend provides cash flows to investors, a share repurchase indicates to the public that a company believes its stock is undervalued and has faith in its long-term viability. Other advantages include · Flexibility, as there’s no “commitment” · Offsets dilution (ex: if stock options are common) · Tax advantage There are certain circumstances (doubt of going concern, concerns on liquidity or financial distress, or if the company advertises high or regular dividends as a rationale for investors) where I would suggest the dividend, but again, barring specific circumstances the stock repurchase is what I’d advise. ●

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