DB, Inc. is publicly traded with a stock price of $50 per share and 200,000,000 shares...

DB, Inc. is publicly traded with a stock price of $50 per share and 200,000,000 shares outstanding. It also expects to have total net earnings of $400,000,000. DB has $200 million in surplus cash that it wants to pay to shareholders. One option is to pay a special dividend. The other option is to repurchase stock with the cash. Evaluate the two alternatives below (ignoring any information effects):

a. What is the price of the company’s stock if it announces

i. a special dividend will be paid (with all $200 million)

ii. stock will be repurchased (totaling $200 million) on the open market

b. What is the EPS of the company if it

i. pays a special dividend with all $200 million

ii. repurchases stock totaling $200 million on the open market

c. What is the P/E ratio of the company if it

i. pays a special dividend with all $200 million

ii. repurchases stock totaling $200 million on the open market

d. Give two reasons why the company should choose to pay the special dividend and two reasons why the company should repurchase the stock.

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jeff jeffy answered 1 year ago

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