Question

11.1.2 FINANCIAL MANAGEMENT [100]

QUESTION ONE [20]

Pukri Ltd is deciding whether to pay out R90 000 in excess cash in the form of an extra dividend or a share repurchase. Current profits are R2,40 per share and the share sells for R20. The abbreviated balance sheet before paying out the dividend is: Equity 240 000 Bank/cash 90 000 Debt 160 000 Other Assets 310 000 400 000 400 000 Evaluate each alternative (i.e: pay the dividend or repurchase the shares) by:

1.1 Calculating the number of shares in issue (4)

1.2 The dividends per share (for the first alternative, i.e. pay the dividend) (2)

1.3 Calculate:

1.3.1 The new share price (6)

1.3.2 The EPS (4)

1.3.3 The price-earnings ratio

Answer 1

Please see the table below. All financials are in $. Please see the third column to understand the mathematics. The last few rows colored in yellow contain your answer.

Sl. No.	Parameter	Linkage	Dividend	Repurchase
1	Equity value on balance sheet	A	240,000.00	240,000.00
2	Cash on balance sheet	B	90,000.00	90,000.00
3	Current EPS	C	2.40	2.40
4	Current share price	D	20.00	20.00
5	Current shares outstanding	E = A / D	12,000.00	12,000.00
6	Net income	F = C x E	28,800.00	28,800.00
	Shares bought back	G = B/D	-	4,500.00
1.1	The number of shares in issue	H = E - G	12,000.00	7,500.00
1.2	Dividend per share	I = B/E	7.50	-
	Equity value now	J = A - B	150,000.00	150,000.00
1.3.1	The new share price	K = J / H	12.50	20.00
1.3.2	The EPS	L = F / H	2.40	3.84
1.3.3	The price to earnings ratio	K / L	5.21	5.21