Question

​(Repurchase of stock​) The Dunn Corporation is planning to pay dividends of ​$520 comma 000. There are 260 comma 000 shares​ outstanding, and earnings per share are ​$4. The stock should sell for ​$49 after the​ ex-dividend date.​ If, instead of paying a​ dividend, the firm decides to repurchase​ stock, a. What should be the repurchase​ price?

b. How many shares should be​ repurchased?

c. What if the repurchase price is set below or above your suggested price in part a​?

d. If you own 100​ shares, would you prefer that the company pay the dividend or repurchase​ stock?

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

Dividend planning to pay= $520,000

Number of shares outstanding= 260,000

Dividend per share= dividend planning to pay/number of shares outstanding

= $2

Price ex dividend= $49

If the dividend was not declared, then price with dividend (cum dividend)= 49+2 =$51

a. Repurchase price=$52

(same as price with dividend)

b. The number of shares to repurchased= dividend planning to pay/repurchase price

= $520,000/$51

= 10,196 shares

c. SET below: Repurchase will fail. As no one will apply to sell their share for a value below market value.

Set above. The stock price will increase and it's recommended to sell the share to the company during Repurchase.

d. Prefer: Stock Repurchase.

Explanation:

Stock repurchases have many benefits,

including Tax benefit: normally share buyback is taxed at the capital gain tax rate. Which is lower than the ordinary Income tax rate for Dividends.