Question

Campbell Corporation is evaluating an extra dividend versus a share repurchase. In either case, $10,000 would be spent. Current earnings are $1.90 per share, and the stock currently sells for $50 per share. There are 4,000 shares outstanding. Ignore taxes and other imperfections.

a. Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth per share. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Alternative I	Extra dividend
Price per share	$
Shareholder wealth	$

Alternative II	Repurchase
Price per share	$
Shareholder wealth	$

b. What will the company's EPS and PE ratio be under the two different scenarios? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Alternative 1
EPS	$
PE ratio

Alternative II
EPS	$
PE ratio

Answer 1

a.

Extra Dividend: After dividend is paid, price of share will go down by amount of dividend paid.

Dividend per share will be: 10000/4000 = 2.5

So price per share will be: Current price - (Div per share) = 50 - 2.5 = $ 47.50

Shareholder wealth (per share) would be $47.5 (stock price) + $2.5 (dividend received) = $ 50.00

Share Repurchase:

# of shares repurchased = 10000/50 = 200

Total number of shares will be: 4000 - 200 =3800

Market Cap will be: Original Market Cap - Repurchased Worth = (4000*50) - 10000 = 190000

Price per share = New market Cap / Outstanding Shares = 190000/3800 = $ 50.00

Shareholder wealth (per share) would be price of each share (since no dividends no price reduction) = $ 50.00

b.

Extra Dividend:

EPS = Total Earnings / number of share = ($1.9 * 4000) / 4000 = $1.90

P/E = Price/EPS = 47.5 / 1.9 = 25.00

Share Repurchase:

EPS = Total Earnings / number of share = ($1.9 * 4000) / 3800 = $2.00

P/E = Price/EPS = 50 / 2 = 25.00