In: Finance
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)
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