Safaris Inc. is weighing the option of an extra dividend versus a share repurchase and the...

Safaris Inc. is weighing the option of an extra dividend versus a share repurchase and the impact that each decision would have on the firm.

Safaris Inc. intends to send $70 000 with reference to both cases. Their current earnings are $3.20 per share. The current selling price of their stock is $30 per share.

Safaris Inc. currently has 4,500 shares outstanding.

Suppose you own one share of stock in this company.

a) If Safaris Inc. issues the dividend, what will your total investment be worth?

b) If Safaris Inc. pursues a share repurchase what will be your total investment be worth?

Ignore taxes and other imperfections.

Please show all working and formulas used. Explain any necessary steps.

Solutions

Expert Solution

Current earnings = $3.2

Current selling price = $ 30

Price earning ratio (PE) = Market price/Earnings per share= 30/3.2 = 9.375

The safaris Inc have option to pursue either extra dividend or share repurchase

Amount available is $ 70,000

Case 1: If safaris Inc wants to issue dividend

Extra dividend per share = 70,000/4,500 = 15.55

Market price = PE ratio * Earnings

= 9.375* 15.55 = 145.78

This price is cumulative of Dividend. Once dividennd is paid, the share price would get affected by such amount.

Total value of one share = dividend + share price

= 15.55+ (145.78-15.55)

= 145.78

Case 2 If safaris Inc wants to repurchase share

The market selling price of share would be same as above = 145.78

The total investment of one share = 145.78

In the first case, shareholder receives dividend in cash & share price will be selling at reduced price.

In both cases the share investment value will be same.

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

Just Right Incorporated is considering the option of an extra dividend versus a share repurchase and...

Just Right Incorporated is considering the option of an extra dividend versus a share repurchase and the impact of both decisions on the firm. Just Right plans to spend $85,000 in respect of both scenarios. Just Right’s current earnings are $2.10 per share, and the stock currently sells for $45 per share. Just Right currently has 5,000 shares outstanding. You own one share of stock in this company. If the company issues the dividend, what will your total investment be...

Awake Corporation is evaluating an extra dividend versus a share repurchase. In either case, $10,000 would...

Awake 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.,...

Flychucker Corporation is evaluating an extra dividend versus a share repurchase. In either case $16,000 would...

Flychucker Corporation is evaluating an extra dividend versus a share repurchase. In either case $16,000 would be spent. Current earnings are $1.60 per share, and the stock currently sells for $64 per share. There are 5,000 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.,...

Galles Corporation is evaluating an extra dividend versus a share repurchase. In either case, $16,000 would...

Galles Corporation is evaluating an extra dividend versus a share repurchase. In either case, $16,000 would be spent. Current earnings are $1.60 per share, and the stock currently sells for $64 per share. There are 5,000 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. Round your answers to 2 decimal places, e.g., 32.16.)...

Awake Corporation is evaluating an extra dividend versus a share repurchase. In either case, $18,000 would...

Awake Corporation is evaluating an extra dividend versus a share repurchase. In either case, $18,000 would be spent. Current earnings are $1.70 per share, and the stock currently sells for $64 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.,...

Campbell Corporation is evaluating an extra dividend versus a share repurchase. In either case, $10,000 would...

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.,...

Awake Corporation is evaluating an extra dividend versus a share repurchase. In either case, $15,000 would...

Awake Corporation is evaluating an extra dividend versus a share repurchase. In either case, $15,000 would be spent. Current earnings are $1.60 per share, and the stock currently sells for $48 per share. There are 2,500 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.,...

Rudolph Corporation is evaluating an extra dividend versus a share repurchase. In either case, $16,000 would...

Rudolph Corporation is evaluating an extra dividend versus a share repurchase. In either case, $16,000 would be spent. Current earnings are $2.00 per share, and the stock currently sells for $50 per share. There are 2,500 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. (Round your answers to 2 decimal places. (e.g., 32.16)) Alternative I Extra dividend...

Hodgkiss Corporation is evaluating an extra dividend versus a share repurchase. In either case, $27,000 would...

Hodgkiss Corporation is evaluating an extra dividend versus a share repurchase. In either case, $27,000 would be spent. Current earnings are $2.70 per share, and the stock currently sells for $96 per share. There are 4,500 shares outstanding. Ignore taxes and other imperfections. 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.) Extra Dividend Share Repurchase EPS $ $ PE...

Mustang Ltd. Is evaluating an i) extra dividend, and ii) a share repurchase. In either case,...

Mustang Ltd. Is evaluating an i) extra dividend, and ii) a share repurchase. In either case, $13,325 would be spent. Current earnings are $4.25 per share, and the share sells for $116. There are 5125 shares outstanding. Ignore taxes and other transaction fees and charges in answering the following questions. REQUIRED a. Evaluate the two alternatives [i) and ii)] in terms of the effect on the price per share and on shareholder wealth. b. What will be the effect on...

Subjects