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Fastspeed Couriers has experienced one of their toughest years yet. They are deciding whether to pay...

Fastspeed Couriers has experienced one of their toughest years yet. They are deciding whether to pay out R80 000 in accumulated cash in the form of an extra dividend to shareholders or embark on a share repurchase campaign. Current profits are R3.40 per share and the share sells for R36. Their abbreviated balance sheet before paying out the dividend is as follows:


Assets

Bank/Cash 100 000

Other Assets 280 000

Total    380 000

Equity & Liability

Equity 310 000

Debt 70 000

Total 380 000

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

1.1 Calculating the number of shares in issue. (2)

1.2 Calculating the dividends per shares (only for the first alternative, i.e. pay the dividend). (2)

1.3 Calculating the new share price. (4)

1.4 Calculating the EPS. (5)

1.5 Calculating the Price-Earnings ratio. (4)

Solutions

Expert Solution

1.1 Calculating the number of shares in issue.

Ans: No of share outstanding = Share holder fund / Profit per share = 310000 / 3.4 = 91176

1.2 Calculating the dividends per shares (only for the first alternative, i.e. pay the dividend).

Ans: Divident Per share = Funds available for distribution of divident / No of share outstanding = 80000/91176 = 0.887

1.3 Calculating the new share price. if buy back takes place

Ans: No of share buys back = Amount available for buy back / Market value of share = 80000/ 36 = 2222.22

EPS = 2.5856 x PE ratio 10.588 = 27.38 Price of new share

1.4 Calculating the EPS if buy back takes place

Ans: Total asset - Liability / No shares outstanding = Cash 20000 ( 100000 - 80000) + Other assets 280000 - 70000 debt / No of share out standing 88953.78 (91176-2222.22) = 230000/88953.78 = 2.5856

1.5 Calculating the Price-Earnings ratio.

Ans: Market value of share / EPS = 36/3.4 =10.588

jeff jeffy answered 2 years ago
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