Question

Pukri LTD is deciding whether to pay out R90 000 in excess in the form of an extra dividend or a share repurchase. Current profits are R2,40 per share and the share sells for R20. The abbreviated balance sheet before paying out the dividend is

Equity 240 000                Bank/cash         90 000

Debt   160 000                Other Assests     310 000

           400 000                                            400 000

Evaluate each alternative (I.e.: pay the dividend or repurchase the shares) by:

1. Calculating the number of shares in issue

1.2 The dividends per share (for the first alternative, i.e. pay the dividend)

1.3 Calculate:

1.3.1 The new share price

1.3.2 The EPS

1.3.3 The price earnings ratio

Answer 1

Cash Dividend Option

NO of shares = 240,000 / 20 = 12000

1.2 Dividend per share = 90,000 / 12000

= 7.50

1.3.1

New Share Price = 20 - 7.50 = 12.50

Note : - price per share decreases by the amount of dividend paid

1.3.2

EPS is unaffected because dividends are paid

EPS = 2.4

1.3.3

PE Ratio = Price / Earnings

= 12.50 / 2.40

= 5.208 OR 5.21

Repurchase of Shares Option

NO of shares = 240,000 / 20 = 12000

shares repurchased = 90,000 / 20 = 4500

Remaining shares = 12000 - 4500 = 7500

1.2

There will be no dividends in repurchase option

1.3.1

Share Price will be same as before

Share Price = 20

1.3.2

Earnings = 12000 * 2.4 = 28800

EPS = Earnings / New No of shares

= 28800 / 7500

= 3.84

1.3.3

PE Ratio = Price / Earning

= 20 / 3.84

= 5.208 OR 5.21