Question

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., 32.16.)

    

Answer 1

a)	Alternative 1	Extra dividend
	Price per share	$               59.50	=64-18000/4000
	Shareholder wealth	$               64.00
	Alternative 2	Repurchase
	Price per share	$               64.00
	Shareholder wealth	$               64.00
b)		Extra dividend
	EPS	$                  1.70
	PE Ratio	35.00	=59.5/1.7
		Repurchase
	EPS	$                  1.83	=1.7*4000/(4000-18000/64)
	PE Ratio	35.00	64/1.83