Big Industries has the following market-value balance sheet. The stock currently sells for $20 a share, and there are 1,000 shares outstanding. The firm will either pay a $1 per share dividend or repurchase $1,000 worth of stock. Ignore taxesAssets Liabilities and EquityCash$ 2,000Debt$10,000Fixed assets28,000Equity20,000If total earnings of the firm are $2,000 a year, find earnings per share if the firm pays a dividend. Now find earnings per share if the firm repurchases stock.Find the price-earnings ratio if the firm pays a dividend.Find the price-earnings ratio if the firm repurchases stock. Adherents of the “dividends-are-good” school sometimes point to the fact that stocks with high dividend payout ratios tend to sell at above-average price-earnings multiples. Is Big Industries’ P/E ratio higher if it pays a dividend?Looking back at your answers to parts (a) to (f), do you think that the difference in P/E supports the “dividends-are-good” c

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 13P

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Big Industries has the following market-value balance sheet. The stock currently sells for $20 a share, and there are 1,000 shares outstanding. The firm will either pay a $1 per share dividend or repurchase $1,000 worth of stock. Ignore taxes

Assets		Liabilities and Equity
Cash	$ 2,000	Debt	$10,000
Fixed assets	28,000	Equity	20,000

If total earnings of the firm are $2,000 a year, find earnings per share if the firm pays a dividend.

Now find earnings per share if the firm repurchases stock.
Find the price-earnings ratio if the firm pays a dividend.
Find the price-earnings ratio if the firm repurchases stock.

Adherents of the “dividends-are-good” school sometimes point to the fact that stocks with high dividend payout ratios tend to sell at above-average price-earnings multiples. Is Big Industries’ P/E ratio higher if it pays a dividend?
Looking back at your answers to parts (a) to (f), do you think that the difference in P/E supports the “dividends-are-good” c

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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If total earnings of the firm are $2,000 a year, find earnings per share if the firm pays a dividend. Now find earnings per share if the firm repurchases stock. Find the price-earnings ratio if the firm pays a dividend. Find the price-earnings ratio if the firm repurchases stock.