Rudolph Corporation is evaluating an extra dividend versus a share repurchase. I
ID: 2612980 • Letter: R
Question
Rudolph Corporation is evaluating an extra dividend versus a share repurchase. In either case. $11,000 would be spent. Current earnings are $1.90 per share, and the stock currently sells for $55 per share. There are 4,000 shares outstanding. Ignore taxes and other imperfections. Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth per share. (Round your answers to 2 decimal places, (e.g., 32.16)) What will Rudolph's EPS and PE ratio be under the two different scenarios? (Do not round intermediate calculations and round your final answers to 2 decimal places, (e.g., 32.16))Explanation / Answer
a)
Alternative I
Price Per Share = $ 55
Shareholders wealth = 4000*55 = $ 220000
Alternative II
Price Per Share = $ 55
Shareholders wealth = (4000-11000/55)*55 - = $ 209000
b)
Alternative I
EPS = 1.90
PE Ratio = 55/1.90 = 28.95
Alternative II
Earning = 1.90*4000 = 7600
Outstanding Share = 4000-11000/55 = 3800
EPS = 7600/3800 = 2
PE Ratio = 55/2 = 27.50
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